Iron Ore ends dismal year with a bounce

30 December 2015

Iron ore is rallying on a two-week bounce in steel prices, but the steelmaking ingredient is still on course to be one of the worst-performing commodities again this year owing to a global glut.

Iron ore has jumped 12% since hitting a decade low about two weeks ago, riding the recovery in Chinese steel markets as the nation’s steelmakers cut production to address weakening demand and narrowing margins.

According to the Shanghai-based consultancy SteelHome, China’s stocks of rebar—a type of steel used in construction—have declined to about 3.6 million metric tons, from nearly 8 million tons as recently as March. China rebar futures, a closely watched benchmark for steel, are up roughly 10% over the same period.

Slowing steel production is generally bad for the price of iron ore, as less of the raw material is required by industry. However, after a long, sharp downturn, the hope of a healthier Chinese steel sector is lifting market sentiment.

“Interestingly, as we have seen steel prices recover, iron ore has also recovered, defying its own weak fundamentals,” said Helen Lau, an analyst at Argonaut Securities.

The price of iron ore, the world’s most traded commodity after oil, has fallen dramatically over the past two years as China’s economy has slowed and newly built mines in resource-rich countries such as Australia have ramped up production.

Iron ore rose by 2.2% to US$41.40 a ton on Tuesday, the highest level since Dec. 1, according to The Steel Index, a data provider. About 98% of all iron ore is used to make steel.

While the year-end bounce gives some hope to beleaguered miners of the raw material, it is vastly outweighed by the earlier slump that drove prices to as low as $37 a ton on Dec. 11. The commodity will end the year having almost halved in value for the second time running.

Iron ore has been one of the worst performers again this year, alongside resources such as Brent oil and nickel, which were recently down 44% and 43% respectively. The market has been pummeled by oversupply, as miners such as Rio Tinto PLC and BHP Billiton Ltd. have churned out record volumes.

Australia estimates that it shipped 767 million tons of the ore this year—7% more than in 2014—and projects exports to surge by a further 13% in 2016. The country accounts for nearly three in every five tons of ore traded by sea.

The steep rise in iron-ore supply world-wide coincides with the slowdown in steel production. Global output of steel was down by more than 4% on-year in November, according to the latest figures from the World Steel Association.

Meanwhile, the price of iron ore has collapsed from more than $70 a ton at the start of the year, and roughly $135 at the beginning of 2014. The market’s peak in 2011 was above $190 a ton.

After that plunge, some market analysts are cautiously optimistic on what 2016 may bring for the battered commodity.

“We think there is only limited room for prices to go down from here,” said Ms. Lau. “Iron-ore prices may go higher if steel rises further, and that could surprise the consensus view in the market,” she added.

Others think the increasing cutbacks at China’s steel mills and factories may lead to less demand for iron ore, and ultimately send prices to fresh lows.

Chinese leaders next year aim to tackle persistent industrial overcapacity as a priority, according to government plans published by the official Xinhua News Agency this month. Stockpiles of iron ore at China’s major ports have already climbed to their highest level in seven months.

“If this capacity cutting continues not only will port stockpiles continue to rise, but iron-ore prices are likely to dip back below the $40 level for an even more extended time, and calls for iron ore in the [$20s] do not look unreasonable,” said Melbourne-based IG analyst Angus Nicholson.

The Australian government recently cut its price forecast for 2016 by 19% to $41.30 a ton, citing the unexpected pace of this year’s price downswing. Morningstar Inc. is also downbeat.

“We continue to forecast weak Chinese fixed asset investment and commensurately tepid demand growth for related commodities such as copper and iron ore,” it said in a report.