Bears In A Conundrum; Iron Ore Prices  On A Second Consecutive 52-Week High

Iron ore prices are on a continuous bull run, and the prices further moved up from its previous 52-week high of US$95.99. The Chicago Mercantile Exchange iron ore is currently trading at US$97.10 (UTC -4 04:07:12), up by 1% as compared to its previous close of US$ 96.13 (As on 16 May 2019). The prices of the commodity made a second consecutive new 52-week high today amid a shortage in supply chain and falling steel inventories.

The prices in China also inched up substantially and closed at RMB 680.50 (as on 16th May 2019) on the Dalian Commodity Exchange.

An array of factors is supporting the iron ore prices in the global market. First, the steel inventory in China is marking a decline. Second, the steel prices are moving above amid shortfall in inventory. Third, shipments of the raw-material are witnessing a decline from the past five weeks. And, the mills are currently operating on a high premium in China.

Post two weeks of consecutive gains, the inventories of hot-rolled coil (HRC) steel marked a decline in the current week till 16th May 2019. As per the data, the HRC inventories across social warehouses and steel mills fell by 1.1% (compared to last week) or 33,800 metric tonnes (as on 16th May) and stood at 3.01 million metric tonnes. The social stocks of HRC dropped by 3.3% and stood at 2.06 million (as on 16th May), down by 69,800 metric tonnes as compared to the previous week.

However, the high steel prices in the global market prompted mills to ramp up the production level, and the stockpiles across the steel mills climbed by 36,000 metric tonnes and stood at 947,300 metric tonnes, up by 4% as compared to a week ago. But, the overall HRC decline by 1.1%.

The steel prices of the most active RB1910 (Oct) contract on the Shanghai Future Exchange further climbed by 1.03% and settled at RMB 3742 (as on 16th May 2019). The high prices in the global market coupled with the fall in inventory could boost the steel mills in China to further enhance the output to take advantage of high steel prices.

Another factor from the supply side is that the iron ore delivery across the Chinese ports is marking a decline from past 5-months. The overall inventory shrank by 0.77% or 0.96 million tonnes to stand at 124.50 million tonnes (as on 10th May). And, Vale a significant iron ore producer is yet to take time to retest the normal production level.

After including the current week fall, the overall inventory of iron ore is further expected by the market participants to fall, which might provide support to the iron ore prices.

The current devaluation of Chinese yuan extended the previous level of drop in yuan, which in turn, is prompting the physical market to raise quotes on iron ore prices as well.

Source: Thomson Reuters; USD/CNY Daily Chart

And, the average mill margins in China are currently around 500-600 yuan per metric tonne of steel production, which could lead towards a further demand in the iron ore market and support the prices.

The iron ore miners in Australia such as Fortescue Metals Group Limited (ASX: FMG), welcomed the new 52-weeks high and the share prices of the company rose significantly from the level of A$7.445 (Day’s low on 13th May 2019) to the current high of A$9.020 (as on 17th May 2019).

 Source: Thomson Reuters; FMG Daily Chart


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