After exploding higher at the start of last week and posting its largest one-day increase on record, the iron ore price continued to soften on Friday, falling by more than 1%.
According to Metal Bulletin, the spot price for benchmark 62% fines fell by 1.43%, or 83 cents to $57.09 a tonne, trimming its year to date advance to 33.1%.
It was the fourth straight decline recorded, and left the benchmark price down 10.4% from the multi month peak of $63.74 a tonne struck on Monday. Despite the recent weakness, at 6.2%, the weekly rise was the largest seen since July last year.
Mirroring the move in the spot price, Chinese iron ore and rebar futures continued to fall on Friday evening, suggesting that further weakness may materialise today.
The May 2016 iron ore contract on the Dalian Commodities Exchange last traded at 426.0 yuan, down 1.5% for the session. May 2016 rebar futures on the Shanghai Futures exchange were down by a similar margin, sliding 1.42% to 2078 yuan.
While the movements in futures markets have been wild of late, fuelled by increased speculative forces, should the declines be sustained during today’s day session beginning at 12pm AEDT, it points to the likelihood that the spot iron ore price may slide for a fifth session on Monday.
Over the weekend most Chinese economic data for February missed expectations, although there was a noticeable acceleration in urban fixed asset investment led by a sharp pick-up in property construction. This too may be influential on the spot iron ore market today.
Iron ore industry wavers between hope and reality: Russell
If the price of the product your company produced had just experienced a 20 percent price surge in one day, its biggest jump ever, it would be reasonable for you to be overjoyed. But maybe not if you are an iron ore miner.
This month’s leap in Asian spot iron ore prices coincided with the annual Global Iron Ore and Steel Forecast conference in Perth, capital of Western Australia state and home to the iron ore operations of three of the world’s four biggest producers.
Spot iron ore soared to $62.60 a tonne on March 7 from a prior close of $52.40, a record in percentage terms and the biggest dollar move in four years.
The problem for the insiders at the Perth conference is that as much as they would like to believe the move is sustainable, nobody really does.
The question that came up repeatedly was whether there was any fundamental justification for the gain, or whether it’s just the market responding to a sentiment-driven rally by retail Chinese investors trading on the Dalian Commodity Exchange.
While it’s certainly possible to construct a case that the outlook for Chinese steel demand has improved slightly in recent months, it’s hard to argue that there has been enough of a change in the underlying market fundamentals that would support a prolonged recovery in iron ore prices.
The weekend meeting of China’s ruling Communist party certainly provided sparks of good news, with a commitment to increase economic stimulation, as well as to rationalize the massive overcapacity among loss-making steel mills.
Often, a sentiment-driven price gain comes before any actual increase in physical demand, so in order for this rally to prove sustainable, it will have to be followed by signs of rising Chinese steel consumption, and thus higher iron ore imports.
There is also a growing realisation that the iron ore market is fundamentally changing via the Dalian futures contract .
While open interest has been rising, the contract is still largely a day-traded vehicle for small investors, and thus can be influenced by sentiment driven by reports in the Chinese-language media.
The rally on March 7 came after a weekend of events and announcements that would have been presented in a very positive light by many Chinese news outlets, helping to create momentum.
This increasing financialisation of iron ore will no doubt lead to higher volatility and periods when the futures markets appear to disconnect from fundamentals, similar to what can happen with crude oil.
LIFE AFTER COST-CUTTING?
Judging from the presentations at this week’s conference in Perth, the increased dynamics in iron ore pricing and trading have yet to make much of a mark in the thinking of iron ore producers.
Both Rio Tinto and BHP Billiton used their presentations to talk about their success in driving down costs and their view that there is still more to come on that front.
There is no doubt that the achievement in cutting the cost of getting a tonne of iron ore to an export port down to around $15 is worthy of praise.
But there is also a feeling that the iron ore majors need to do more than just talk about costs, that they need to focus a bit more on strategy.
BHP Billiton’s new head of iron ore assets, Edgar Basto, did take a moment to reiterate the company’s view that China’s steel output will peak around 935 million to 985 million tonnes a year in the mid-2020s.
Rio Tinto’s manager for its Pilbara mines in Western Australia, Michael Gollschewski, however, didn’t mention the company’s forecast for Chinese steel output to rise to 1 billion tonnes a year by 2030.
He did say Rio Tinto believed iron ore capacity additions in 2016 would be matched by closures of higher-cost output, leaving the market in balance.
That’s certainly possible, but it’s also possible that any rally in iron ore prices, if sustained, will allow weaker players to stay in the market, especially in China, which is expected to provide the bulk of output curtailments.
For this reason alone, an iron ore rally looks unsustainable, even if there is an actual pick up in steel demand in China.
Source: hellenicshipping