SLX - Iron Ore Demand Remains Strong But Will It Last?
Summary
- Concern over China’s economy notwithstanding, iron ore remained relatively stable in September and October. This is of note because historically, these months are one of China’s highest peak demand periods.
- The spot price has, by and large, remained on an even keel despite fluctuations in the Chinese economy.
- It seems everyone and anyone continue to call for some government support or intervention to help stabilize the real estate market in China.
By Sohrab Darabshaw
Concern over China’s economy notwithstanding, iron ore remained relatively stable in September and October. This is of note because historically, these months are one of China’s highest peak demand periods. That said, whether the iron ore price will continue to weather the economic storm remains a point of intense debate.
The Many Factors Affecting the Iron Ore Price
Let’s get the facts straight first. Iron ore price continued to move in the US $91 to $120 a ton range, as it has for the last three months. This comes after the price hit a high of $160.30 in the weeks following Russia’s February 24 invasion of Ukraine.
The spot price has, by and large, remained on an even keel despite fluctuations in the Chinese economy. However, in recent months, the spot price swung from outright, blind optimism to the other end of the spectrum over problems in the real estate/construction sector, one of the biggest consumers of Chinese steel.
Indeed, China buys nearly 70% of seaborne iron ore volumes. This, in turn, accounts for about 50% of global steel output. Naturally, it is a key factor in determining iron ore prices. Back in 2021, for instance, China bought about 70% of the world’s total iron ore exports to the tune of about $180 billion.
But customs data shows that China’s imports of ore actually rose in September, climbing roughly about 3.6% from the previous month. In total, the country brought in 99.71 million tons of raw material vs. August’s 96.21 million tons. The September 2022 figure was also up from the 95.61 million tons imported in September 2021.
October Offers a Warning Regarding Iron Ore Price
None of this is surprising, considering Chinese steel companies raised blast furnace utilization rates during September. At the time, they were mainly preparing for the peak construction season. However, October proved a very different story. Over the past 30 days, traders have largely shrugged off data showing profits as China’s industrial firms shrank faster in January-August. The main culprit? Strict COVID-19 restrictions and the ongoing construction crises.
With October nearly over, iron ore prices continue to do the yo-yo dance amid a slowdown in steel output. This month, blast furnace rates in Tangshan, a well-known Chinese steel hub, dropped for the first time in five weeks. Meanwhile, negative margins combined with weaker demand prospects proved major challenges for steel mills, prohibiting them from increasing production.
Rio Tinto has also warned of a continued slowdown in global commodity markets. The company cites the threat of recession in Europe and the US and a property crisis in China, all of which continue to weigh on iron ore demand. Representatives for the Anglo-Australian mining company stated that they expect commodity prices to keep sliding as “downside risks to demand” emerge. Meanwhile, iron ore price contracts in Singapore have managed to fall more than 46% from their most recent peak in March.
Chinese Leaders Offering Little Support
It seems everyone and anyone continue to call for some government support or intervention to help stabilize the real estate market in China. According to many experts, this is the only way to create a major positive demand shift over the next few months.
Unfortunately, the Communist Party’s Congress in Beijing ended last Sunday with little in the way of some concrete economic proposals. As a result, the iron ore price continued to drop. Indeed, many were hopeful that Chinese President Xi Jinping might offer changes to policies that have affected steel demand in the past year. Ultimately, nothing of the sort happened.
Iron ore is currently trading close to its lowest point this year, below the $91.55 a ton mark. Meanwhile, bearish conditions will likely affect the steel industry in the last quarter of 2022. With recession risks and the slowdown in China, some steel mills have even stopped production in advance for winter repairs. To many, the question is not whether this trend will continue, but rather how long it will last.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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Iron Ore Demand Remains Strong, But Will It Last?