Iron ore continues to climb despite weakness in steel prices

Damon Corso / Barcroft Media / Getty Images
  • Iron ore spot markets continued to climb on Monday despite renewed weakness in Chinese steel prices.
  • The gains were led by lower grades which surged 2% to a fresh cyclical high.
  • Chinese steel futures continue to slide after a strong rally in recent weeks. Lower steel prices, hence steel mill profitability, may explain the surge in lower grade iron ore prices recently.

Iron ore spot markets continued to climb on Monday despite renewed weakness in Chinese steel prices.

According to Metal Bulletin, the price of 58% fines surged 1.9% to $46.19 a tonne, leaving it at the highest level in over a year.

Higher grade ores also closed at fresh cyclical highs with the price of 65% Brazilian fines inching up 0.2% to $98.60 a tonne.

After a strong since early October, the rally in benchmark 62% fines took a breather, closing the session unchanged at $76.48 a tonne.

All three grades have risen more than 20% from their year-to-date lows, and sit at multi-month or multi-year highs.

The continued strength in spot markets came despite renewed selling in Chinese steel futures on Monday.

Rebar futures in Shanghai finished Monday’s day session at 4,150 yuan, down from Friday’s night session close of 4,188 yuan. Hot-rolled coil futures suffered even larger falls, ending trade at 3,835 yuan, nearly 3% below the prior day session close.

Steep declines were also seen in coking coal and coke contracts, extending the falls seen on Friday evening.

The January 2019 coking coal contract finished trade at 1,388 yuan, slightly lower than the prior close of 1,392.5 yuan. Coke futures slumped to 2,371 yuan, down sharply from the 2,401 yuan close on Friday evening.

Despite continued falls in steel and other bulk commodity contracts, Dalian iron ore futures put in a resilient performance, managing to cling onto much of Friday’s night session gains.

The January 2019 contract finished at 538 yuan, some 2.5 yuan off the close on Friday evening.

According to Macquarie Bank’s commodity research team, the strong gains in iron ore spot and futures markets since the end of Golden Week holidays in China earlier this month can be explained by three distinct factors.

“We see three factors operating here: a rush to boost steel output in China, before authorities there impose controversial winter controls; an incremental shift to lower-grade ores, as mills attempt to manage a margin-squeeze; and, a general strategy to hold utilisation rates stable, in order to keep as many assets operating as possible, throughout winter,” they said.

The second point — a preference shift from mills towards cheaper, less-efficient ores — may explain the outperformance seen in lower grades in recent weeks.

Reversing the trend seen earlier in the session, Chinese steel, coke and coking coal futures all inched higher in overnight trade, partially reversing earlier losses.

Iron ore futures, however, continued to ease lower.

SHFE Rebar ¥4,170 , -0.50%
DCE Iron Ore ¥536.00 , -0.83%
DCE Coking Coal ¥1,390.00 , -0.50%
DCE Coke ¥2,385.50 , -0.58%

Despite the mixed price action during Monday’s night session, the modest recovery in steel contracts should act to underpin iron ore spot markets should recent trends be maintained.

Chinese commodity futures will resume trade at midday AEDT.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.