Iron Ore Might Whiplash Your Returns Ahead; Things to Consider Before Pulling Trigger

Iron ore rally finally takes a breather after posting gains for of over 19% over ten consecutive trading sessions, which took the prices of Iron ore futures in China (DCIO) from RMB 574.00 (intraday low on 10 February 2020) to the high of RMB 684.50 (intraday high on 24 February 2020).

Iron ore prices were subdued due to the coronavirus previously; however, the shipping concerns from Australia and Brazil, instigated supply worries across the steelmakers, supported the iron ore price.

Also Read: Base Metals and Iron Ore Turning Red Hot as Coronavirus Turns into a Pandemic Threat

The iron ore supply ports in the Pilbara Region remained non-operational due to the impact of a tropical cyclone, while heavy rains stormed the operations across the Brazilian ports. Apart from the supply worries, the rising steel prices across the globe supported the demand for iron ore and kept the prices elevated despite the deeper impact on steel demand across China.

To Know More, Do Read: Iron Ore Gushes as Tropical Cyclone-Blake Raises Supply Concerns

The steel rebar futures on the London metal exchange rose from USD 407 a tonne (close on 6 February 2020) to the present high of USD 429 (close on 25 February 2020), which marked a gain of ~ 5.40 per cent. The rise in steel prices was mainly due to the latest steel figures, which suggested that the production of steel fell across the globe, except China, France, and the United States.

LME Steel Rebar Futures (near-month) (Source: LME)

Global Steel Production Surges 2.1 per cent Annually

As per the latest report from the World Steel Association (WSA), the global steel production (64 participants) rose by 2.1 per cent against the previous corresponding period in January 2020 to stand at 154.4 million tonnes.

While global steel production rose on back of the increase in production from China. China crude steel production surged by 7.2 per cent against pcp to stand at 84.3 million tonnes, while the crude steel production in India, Japan, South Korea, Italy, Ukraine, and Brazil tumbled.

The crude steel production in India fell by 3.2 per cent against pcp to stand at 9.3 million tonnes, while the production fell by 1.3 per cent in Japan, and 8.0 per cent in South Korea, to stand at 8.2 million tonnes and 5.8 million tonnes, respectively.

In the European Union, the crude steel production in Italy fell by 4.9 per cent against pcp to stand at 1.9 million tonnes, while in France, it rose by 4.5 per cent to stand at 1.3 million tonnes.

The production in the United States rose by 2.5 per cent against pcp to stand at 7.7 million tonnes, while output from Brazil declined by 11.1 per cent to stand at 2.7 million tonnes. The output from Turkey plunged by 17.3 per cent to stand at 3.0 million tonnes.

(Source: WSA)

The higher steel production in China again provided some cushion to the iron ore. On a monthly basis, the steel production in China during January 2020 remained unchanged as compared to December 2019, which further marked the third straight month of high steel production.

In the status quo, the higher Chinese steel production is yet to reach the global market fully, which has been restricted due to the lack of transportation and stringent measures such as limiting the entry of ships across the ports, taken by many countries to prevent the spreading of the coronavirus.

What’s Next?

• Towering Steel Inventory in China

The higher production and limited export from China have created a pile-up of steel across the major steelmaking provinces. As per the data, the social inventories of long-steel across the Guangzhou provinces have surged by 29.3 per cent against the same period last year on a lunar calendar basis.

• As on 26 February 2020, the overall stocks of long steel rose by 14.16 per cent against the previous week to stand at 2.48 million metric tonnes, while the rebar inventories soared by 6.69 per cent against the previous week to stand at 1.62 million metric tonnes, which also remained 31.5 per cent higher as compared to the same period after the Chinese New Year a year ago.
• As per the China Iron and Steel Association (CISA), the steel inventories across the steelmakers have reached a record high amid the coronavirus outbreak. The steel products across the key makers rose by 15.27 per cent in 10 days to stand at 21.34 million metric tonnes (as on 25 February 2020), which also remained 123.88 per cent higher against the start of the year 2020.
• During the first 20 days, the key steelmakers across China produced 37.74 million metric tonnes of crude steel.

• Diminishing Supply Constraints

The iron ore supply constraints, which kept the price ignited despite coronavirus outbreak, are now showing diminishing signs, which could further increase the volatility ahead. As per the latest estimates available, iron ore deliveries leaving the Australian ports soared by 4.28 million metric tonnes (as on 22 February 2020) to stand at 14.45 million metric tonnes, while the deliveries from the Brazilian ports are estimated by industry experts to go up by 480,000 metric tonnes to stand at 4.61 million metric tonnes (for the week ended 22 February 2020).

While the inventory of steel is accumulating in China and iron ore supply worries getting minimal, many mills across the nation are undertaking maintenance, and slightly less than half of the key mills are reducing output.

The market anticipates that the maintenance and production pullback has reduced the pig iron output by 192,000 metric tonnes a day (as on 24 February 2020), which in turn, is further projected to reduce the average iron ore demand by 330,000 metric tonnes.

In a nutshell, the supply concerns, which coupled with high steel production and steel prices supported the iron ore price despite the coronavirus impact, is now diminishing, and the steel inventory across China is towering, which could soon mark its way to the global front and impact the steel prices.

The accumulated impact of high steel inventory in China, diminishing supply worries of iron ore, and production pullback from the Chinese steelmakers is likely to increase the volatility in iron ore ahead.

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