Iron Ore Gushes as Tropical Cyclone-Blake Raises Supply Concerns

  • Jan 14, 2020 AEDT
  • Team Kalkine
Iron Ore Gushes as Tropical Cyclone-Blake Raises Supply Concerns

Iron ore prices are showing a sharp recovery in the wake of coming Lunar New Year holidays in China, which has led to restocking across the Chinese steel mills, and the surmounting tensions clouding the supply chain from Western Australia due to the tropical cyclone Blake, which is estimated by the weather experts to slow down the activities at Port Walcott and Dampier.

ASX iron ore stocks are gushing on the exchange over the rally in iron ore prices and decent demand in China over the temporary removal of steel manufacturing suspension across many high steel making provinces in China.

Iron ore futures contract across the Dalian Commodity Exchange soared from RMB 526.00 (intraday low on 28 August 2019) to the present high of RMB 684.50 (intraday high on 8 January 2020), which underpinned a price appreciation of ~ 30.15 per cent.

However, the prices are now showing slight correction from its recent top as the restocking process is steaming out.

Demand and Supply Dynamics

Until recently, iron ore has witnessed a spiked demand as China is entering holiday sessions. The steel mills in China stockpiled iron ore ahead of the holidays in the wake of environmental bans removal across many steel producing provinces.

The higher demand pulled the iron ore inventory across the 35 significant Chinese ports lower, and as per the data, the iron ore inventory across those ports fell by 1.67 million metric tonnes (as on 10 January 2020) to stand at 113.74 million metric tonnes.

The fall in iron ore inventory for the week ended 10 January 2020 marked the second consecutive weekly fall, which further supported the iron ore prices.

At present, the delivery from the 35 substantial ports in China cooled-off as restocking by the Chinese mills steamed-off, interpreted by the decline in average deliveries.

Iron ore deliveries plunged by 77,000 metric tonnes (for the week ended 10 January 2020) to stand at 2.79 million metrics per day. However, the prices are still in momentum despite lower deliveries as traders raise quotes in the wake of supply concerns from Western Australia.

On the supply counter, the topical cyclone Blake is expected by the Bureau of Meteorology (or BOM) to reach Category 2 intensity, which is further anticipated by many supply management experts to hinder the port’s activity in Pilbara and West Kimberley.

The expectations of disturbance in port’s activity across Western Australia prompted the iron ore traders in China to maintain high quotes, which in turn, supported the iron ore prices.

Market Actions

At present, the market remained in an overall bullish mood, and the prices broke out of the resistance zone, as suggested in our previous article.

To Know More, Do Read: Are Bulls Taking Charge in Iron Ore? Or Is Gold Ready for a Big Move? – Ask the Charts

On the yearly production basis, China’s steel production is surmounting, which is also fuelling the demand for iron ore. As per the latest data available with World Steel Association (or WSA), China produced 80.3 million tonnes of steel in November 2019, which remained 4.0 per cent higher against the previous corresponding year (or pcp).

Albeit, on a monthly basis, the steel production in China is slow, the year-on-year increase in production is propelling the iron ore demand in China, and Australian iron ore miners are gaining attraction as China remained the number one importer of the Australian iron ore supply chain.

Over the year-on-year increase in steel production, iron ore prices in China is on a surge, and the prices at this time of the year 2020 are ~ 15.45 per cent higher against January 2019 peak of RMB 560.00.

However, many price forecasters such as the Department of Industry, Innovation and Science (or DIIS) had predicted the iron ore prices to cool-down ahead as the supply chain from Australia and Brazil restores in the short- to medium-term.

To Know More, Do Read: Mid-Year Budget Lowers Iron Ore Price Forecast; Emerging High-Yielding Dividend Opportunity?

The development across the bilateral trade issues is supporting the steel outlook across the global front, which in turn, is supporting steel prices in the international market. The prices of construction steel or steel rebar (front-month) have recovered from its recent low of USD 395 per tonne (as on 1 October 2019) to the present level of USD 444.0 per tonne (as on 13 January 2020), which marked an increase of ~12.40 per cent.

The improvement in steel prices is further prompting Chinese mills to raise output in order to enclose the profitability over the short-term, which in a cascade is good for iron ore prices over the short-term; however, over the long-term the rising supply of steel along with a slowdown in economic cycle, as anticipated by industry experts for the second quarter of the year 2020, could be a headwind for the iron ore industry ahead.

Also, the revival in the supply chain, especially due to the re-entry of the Brazilian mammoth- Vale, is also expected by the market to lower the price in the long-term.

Despite, whatever the long-term outlook is, iron ore is gaining momentum in the market over the supply concerns and higher demand in the status quo, and it would be worth looking for how long the commodity keep this momentum up to provide a push for the ASX iron ore stocks.

Key takeaways

  • Iron ore prices are showing a sharp recovery in the wake of coming Lunar New Year holidays in China.
  • Demand remains decent in China over the removal of steel manufacturing suspension across many high steel making provinces in China; increasing restocking across Chinese steel mills.
  • The iron ore inventory plunges for the second consecutive week to stand at 113.74 million metric tonnes (as on 10 January 2020).
  • Deliveries from ports declined for the same week, suggesting restocking activities cooling-off now.
  • Tropical cyclone-Blake is expected to reach Category 2 intensity; causing supply concerns and supporting the prices.
  • High steel prices and production is also fuelling the iron ore demand.
  • Long-term projections for iron ore remain negative over anticipated recovery in the supply chain.
  • Short-term gains are likely to slow-down, as restocking nears completion.

 


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