Temporary supply bottlenecks and falling stocks at Chinese ports have prompted a rally in iron ore prices since early-April. However, supply is expected to pick up strongly, at a time of subdued demand, which should lead to a renewed downturn in prices, according to a report from Capital Economics.
The group believes the 40% rally since early April was likely in response to signs of an upturn in Chinese steel output and falling inventories at the nation’s ports. However, while this is normally driven by increased demand after the Lunar New Year holidays, on this occasion the price spike may have been caused by disruptions at Australian and Brazilian ports.
“Steel output usually rebounds in Q2, after the holidays in Q1, and it was still 1.7% lower in y/y terms in May. As such, the drop in China’s iron ore stocks appears to be more about supply than demand. Indeed, port disruptions in both Brazil and Australia have acted as a constraint on iron ore import volumes. Lower Chinese domestic output added to upward pressure on prices, but official data suggest it is, at least, stabilising. Admittedly, Vale, the Brazilian miner, recently suggested the official Chinese production data underestimate the scale of closures, but, for now, its claims have not been substantiated”.
The chart below shows the drop in Chinese iron ore imports.
With miners such as Atlas Iron restarting production, along with an expected pickup in supply from Australia and Brazil in the second half of the year, the group maintains its bearish forecast that the spot price will slump to $45 a tonne by year-end.
“Taking all this together, and barring further unforeseen disruptions, iron ore supply from Australian and Brazilian producers is set to pick up strongly in H2 at a time of still struggling Chinese steel output. Even though we have factored in a 15% y/y drop in Chinese iron ore production this year, the market can still be expected to record a huge surplus. As such, we retain our forecast that iron ore prices will fall back again to $45 per tonne at end-year, from $65 currently”.
As the chart using ABS data below indicates, while Australian iron ore supply looks set to increase, this will not necessarily translate to higher export income, especially if the spot price remains under pressure.
Overnight the spot price for 62% fines closed at $62.91 a tonne, according to pricing provided by Metal Bulletin.