Iron ore’s plunge is about finally catching up to steel’s slump
The 15 percent plunge in iron ore prices in the past week certainly looks dramatic, but is more a case of the raw material finally catching up to a more established trend of weakness in Chinese steel prices.
However, the drop in iron ore is more than just a cause for concern for miners in Australia, Brazil and South Africa, as it may alter the dynamics of what quality of ore Chinese mills prefer.
The spot price of ore with 62 percent iron content MT-IO-QIN62=ARG, as assessed by Argus Media, dropped to $64.60 a ton on Monday, down 6.9 percent from its previous close.
Since its recent peak of $77.80 a ton on Nov. 9, it has shed 17 percent, a relatively steep decline in a short time period.
Shanghai steel rebar futures have dropped by more than iron ore, but over a longer time span.
The contract fell as low as 3,496 yuan ($503.75) a ton during Monday’s trade, formally putting Chinese steel in a bear market, having slumped 21 percent from the seven-year high of 4,418 yuan on Aug. 22.
Steel rebar has been in a downward trend since the August high, while at the same time iron ore prices were actually still gaining, at least until about a week ago.
Iron ore futures on the Dalian Commodity Exchange rose 12.4 percent from Sept. 29 to their recent peak of 540.5 yuan a ton on Oct. 29.
Similar to spot prices, iron ore futures then moved modestly down until Nov. 22, when they started to correct sharply.
Given the historical correlation between steel and iron ore prices, it was always likely a matter of time before iron ore caught up to the weakness in steel.
It was likely the general weakness in commodity prices, especially the capitulation in crude oil, that provided a trigger for iron ore to stop defying gravity.
BOOST FOR LOW-GRADE IRON ORE?
It’s also worth noting that so far iron ore volumes are holding up on the seaborne market, with vessel-tracking and port data compiled by Refinitiv pointing to China’s imports being at least steady in November from October.
As of Nov. 26, 78.14 million tons of iron ore has been discharged at Chinese ports, or was awaiting unloading, for the month.
With four more days left in the month, it’s likely the final number will be around 90 million tons, higher than the customs figure of 88.4 million for October, but below the ship-tracking number of 93.3 million tons.
The vessel-tracking data and customs numbers don’t align perfectly because of slight differences in when cargoes are processed, and also because China imports small volumes of iron ore overland.
The short-term outlook for iron ore prices is being clouded by several factors, including how widespread and effective will China’s closure of steel mills over winter be, and the ongoing rising and dashing of hopes of a resolution of the trade dispute with U.S. President Donald Trump.
However, it is likely that if weakness persists in steel and iron ore prices, the dynamic so far this year of Chinese steel mills preferring high grade iron ore may start to unwind.
Steel mills have been paying a premium for higher quality iron ore in order to maximize output from their blast furnaces.
They were doing this because the profit margin for a ton of steel rose as high as 1,200 yuan a ton earlier in the year, meaning maximizing output made sense.
However, the retreat in steel prices has eroded margins and it may prompt steel mills to use lower quality iron ore in order to cut costs.
There’s not too much sign of this yet, although the spot price of 58 percent iron ore MT-IO-QIN58=ARG, as assessed by Argus Media, has somewhat outperformed the higher grade 62 percent ore in the recent price decline.
The lower quality ore has shed 15.1 percent of its value from its recent peak on Nov. 9, while the 62-percent grade has dropped 17 percent.
That’s not yet a significant difference, but this may widen if steel prices remain under pressure.
Tokyo Steel to raise heavy plate prices for December
Tokyo Steel Manufacturing Co Ltd , Japan’s top electric-arc furnace steelmaker, on Monday said it will raise prices for its heavy plates in December by 2.5 percent to reflect tight market conditions amid solid construction demand.
This will mark the company’s first hike for heavy plates in eleven months. Tokyo Steel will keep prices steady for other products, though, including its main one, H-shaped beams.
The steelmaker last raised prices for heavy plates in January, and for other products except for galvanized sheet coils in February.
“Domestic construction demand for heavy plates has been very strong and we expect this situation to continue for a while,” Tokyo Steel Managing Director Kiyoshi Imamura told reporters at a briefing.
“Also, we don’t expect imported products will easily replace local supplies due to strict requirements including quality from customers in Japan,” he said.
Prices for heavy plates will be lifted to 83,000 yen ($737) per ton from 81,000 yen. Prices for steel bars, including rebar, will remain at 69,000 yen a ton. H-shaped beams will stay at 89,000 yen.
Tokyo Steel’s pricing is closely watched by Asian rivals such as South Korea’s Posco and Hyundai Steel , and China’s Baoshan Iron & Steel Co Ltd (Baosteel) .
Imamura also said the recent price plunge in some steel products such as hot coils and slabs in the rest of Asia worried the company.
“With concerns that the escalating U.S.-Sino trade spat may cool the economy in China and the rest of the world, some mills in China, Russia and Turkey are lowering their offer prices for hot coils and slabs,” he said.
“We need to closely watch the market trend in Asia.”
Nickel slumps to 11-month low on stainless steel worries
Nickel fell to an 11-month low on Monday on worries about stainless steel, while other base metals were pressured by uncertainty about the global economy.
Aluminum touched the weakest since August last year as speculators piled on more bearish positions.
“The macro pressures continue to weigh on the downside, such as China’s growth situation, Europe’s political uncertainty and also the dollar’s pretty strong,” said Geordie Wilkes, head of research at Sucden Financial in London.
“People are now looking to the G20 for some sort of clarification, but I’m cautious about the negotiations on the (China-U.S.) trade war.”
In addition to the macro-economic concerns, nickel was weighed down by the stainless steel market, the main source of demand for the metal.
“Stainless steel prices dropped a lot in the last two weeks because production is too high … Investors are quite bearish about the futures market,” said Peter Peng of CRU Group.
Increasing nickel pig iron production and rising Shanghai nickel inventory also pointed to further nickel weakness in the short term, said analyst Helen Lau of Argonaut Securities.
Three-month nickel on the London Metal Exchange shed 0.7 percent to $11,375 a ton in official open outcry trading, its lowest since Dec. 15 last year.
* DOLLAR: The dollar climbed to a 16-month high, making dollar-denominated metals more expensive for buyers paying in other currencies.
* STEEL: Shanghai rebar steel prices tumbled nearly 4 percent to the lowest since late July, pressured by worries over slowing demand in top consumer China over the seasonally weak winter period.
That weighed on zinc, mainly used in galvanized steel, with the LME price 1.8 percent weaker at $2,478.50 a ton in official activity.
* ALUMINIUM INVENTORIES: LME on-warrant aluminum stocks MALSTX-TOTAL, those not earmarked for delivery, rose 5,550 tons to 745,750, data showed on Monday. They have climbed 22 percent over the past month.
LME aluminum, untraded in official rings, was bid down 0.7 percent to $1,942 a ton, the lowest since Aug. 7 last year.
* RUSAL: The United States said on Friday it was postponing the enforcement of sanctions on Russia’s Rusal, the world’s second-biggest producer, until Dec. 12 as its top shareholder works on a plan to cut his stakes.
* COPPER: LME copper bucked the weaker trend, bid up 0.1 percent at $6,060 a ton.
“Some Far Eastern short-covering on the London open today has been met by a resumption of CTA (Commodity Trade Advisor) selling,” Alastair Munro at broker Marex Spectron said in a note.
* PRICES: Lead was bid down 2.4 percent at $1,930 a ton in official rings, while tin traded up 0.7 percent at $19,275.
South Africa says U.S. exempts it from some steel, aluminum tariffs
South Africa said on Wednesday that the United States had granted some local steel and aluminum producers exemptions from tariffs imposed by U.S. President Donald Trump this year.
Trump’s decision to impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum riled metals producers worldwide, though some major exporting nations secured exemptions for all their steel and aluminum products.
The U.S. Department of Commerce granted exemptions for 161 aluminum and 36 steel products made by companies whose U.S. customers asked for the exemptions, South Africa’s Department of Trade and Industry (DTI) said on Wednesday.
Exempted products included aluminum foil and aluminum plates, sheets and strip, as well as steel hot-rolled bars, hot-rolled sheets, cold-rolled sheets, plates cut and plates in coils, the DTI said.
Shares in ArcelorMittal’s South African unit, which produces some of the products covered by the exemptions, were up 8 percent at 1044 GMT.
The DTI, which earlier warned the tariffs could lead to job losses in manufacturing and mining, said it was still trying to get exemptions for all South African steel and aluminum products.
South African exports of aluminum products account for about 1.6 percent of total U.S. aluminum imports.
“The exemption of these products will contribute towards ensuring that jobs in companies producing these products are retained,” the DTI said.
Job cuts are a hot-button issue in South Africa, which is faced with near-record unemployment of about 27 percent and subdued growth in mining and manufacturing.
Europe hit by steel import surge from U.S. tariffs
Steel imports into Europe have risen sharply as a result of U.S. tariffs, particularly from Turkey, threatening European steelmakers as demand growth in the continent slows, European steel association Eurofer said on Wednesday.
Eurofer said in its quarterly review it expected European Union apparent steel consumption, a reflection of supply to the market, would rise by 2.2 percent this year and by 1.1 percent in 2019.
Trade frictions with the United States and cooling global demand had weakened prospects for EU steel users, Eurofer said.
U.S. President Donald Trump imposed import tariffs of 25 percent on steel from most countries from March 23. It added Canada, Mexico and the European Union to the list on June 1 and doubled the rate to 50 percent for Turkey in August.
Karl Tachelet, Eurofer’s trade director, said the U.S. tariffs had led to a surge in U.S. steel prices of some 40 percent, meaning European producers could still sell some steel there.
“The question for us is how long are the U.S. prices going to stay that high. There will be some correction and when prices go down the 25 percent will be more prohibitive,” he continued.
The main impact to date was that steel that might have gone to the United States was being redirected to Europe.
Turkey, facing a 50 percent tariff, could no longer realistically sell across the Atlantic, while slowing domestic growth left it with more steel to sell.
“They are pushing a lot of volumes into the EU market at any cost,” said Jeroen Vermeij, director of economic studies at Eurofer.
Russia, a traditional exporter of steel to Turkey, was likewise, needing an outlet for its production, Eurofer said.
In the third quarter 2018, Eurofer said steel consumption had risen by just 0.6 percent, but imports increased by 10 percent, meaning EU mills were at best only able to deliver the same amount of steel as last year. Imports now make up some 25 percent of the EU market.
Imports from Turkey and Russia increased by most – from Turkey by 57 percent in the first nine months and from Russia by 56 percent.
The European Union did put in place safeguards to limit steel imports in the light of U.S. tariffs
Eurofer said it was broadly content with the system, but the quotas were global and that country-specific quotas should apply to major exporters to help stabilize the market.
Ramp-up for Anglo American’s Minas Rio mine likely delayed to 2021
Anglo American Plc should restart operations at its Brazilian Minas Rio iron ore mine in November or December but a planned ramp-up to 26.5 million tons per year is likely to be pushed back to 2021 from 2020 as previously expected, the miner’s Brazil chief said on Tuesday.
The company halted production at its Minas Rio mine after two leaks in March in a pipeline that channels slurry more than 500 km (310 miles) from the mine in Minas Gerais state to a port in Rio de Janeiro state.
It has been inspecting the pipeline from April through October, and is working to change out about 4 kilometers of it out of caution after it discovered cracks in the welding.
“We should finish the replacement in November. So everything is on track for us to resume operations in the fourth quarter. It could be in November or December,” Brazil Chief Executive Ruben Fernandes told Reuters on the sidelines of a commodities conference in Rio de Janeiro.
Purchased at the height of the commodities boom a decade ago for $5.5 billion, Minas Rio is Anglo American’s biggest development project. The London-based company was once counting on Minas-Rio to produce 26.5 million tons of iron ore by 2016. As the project hit delays, it had shifted that output goal for 2020.
The company clinched two key permits to ramp up production towards that goal in January, but now expects to receive the key operating license in May, 2019. That means production is likely to hit that long-awaited target of 26.5 million tons in 2021.
“It would be around 2021. It is not a very firm date because it depends on the plant’s performance,” Fernandes said, adding that production should hit the target pace by the last few months of 2020.
Fernandes reiterated Anglo American’s prior estimate of a $300 million to $400 million impact on earnings from the spills this year.
In June, Reuters reported that Anglo American had suspended a nearly $1 billion annual contract to supply Bahrain Steel with iron ore by declaring force majeure in April after the spills.
At the time, Anglo American declined to comment. On Tuesday, Fernandes acknowledged that the two companies were already in arbitration to renegotiate the contract prior to the declaration of force majeure following the spills.
He described the talks as friendly, noting that they include issues like volume and quality, in addition to the incident.
“Without a doubt they are an excellent client,” he said of the Gulf-based company. “There is no reason why we won’t reach a long term deal with them.”
Fernandes said Anglo was also in arbitration with Ferroport, a joint venture it has with port operator Prumo Logistica SA , after declaring force majeure on that contract as well.