The iron ore rollercoaster ride in 2021 shows no signs of easing, with prices ending in an unprecedented drop moving sharply higher as investors monitor simmering debt problems at China Evergrande Group.
The developer’s land ownership unit said it reached an agreement with yuan bondholders on an interest payment, offering some relief after fears about Evergrande’s financial stability led to a global risk leakage. China’s central bank also boosted short-term cash into the financial system, helping stabilize commodity markets.
In Singapore, iron ore futures rose more than 15%, climbing back above $ 100 a tonne from their lowest close in 16 months. Events around Evergrande spooked the market earlier in the week and the steel material was already oversold, said Atilla Widnell, managing director of Navigate Commodities.
Still, analysts warn that China’s steel sector faces prolonged headwinds. The steelmaking ingredient, which was at the forefront of this year’s commodities boom, has plunged 60% from a record of more than $ 230 a tonne in May. Restrictions on steel production, coupled with a housing crackdown and concerns about power shortages, have hit demand for iron ore in China.
“With a continued rollout of energy consumption restrictions, plant maintenance works have expanded and steel volumes for construction in particular have slipped enormously,” said Haitong Futures Co. analyst Qiu Yihong. Demand has also been disrupted by Covid-19 cases, bad weather and further weakness in ownership, manufacturing and cars, he said.
The contraction in iron ore demand could continue as China’s now mature steel sector faces new limits on production, which plunged to a 17-month low in August. Jiangsu, a province with an economy as large as Canada’s, has reduced the supply of electricity to businesses, including factories.
As a result, iron ore will come under increased pressure, falling from $ 80 to $ 90 a tonne heading into next year, said Wayne Gordon, a strategist at UBS Group AG.
“This is probably the last hurray in terms of that fundamental growth in steel demand,” Australia & New Zealand Banking Group Ltd. analyst Daniel Hynes said on Bloomberg Television on Tuesday.
The consequences have been wide-ranging. After the iron ore boom delivered record dividends to the world’s top miners, BHP Group and Rio Tinto Group have since slumped due to falling prices.
So far, iron ore has averaged about $ 178 a tonne this year, according to figures from Mysteel Global. UBS now expects the annual average to decline to $ 163 a ton and forecasts just $ 89 for next year. Liberum Capital Ltd. forecasts $ 93 a tonne next year.
The biggest problem for Chinese mills is uncertainty, according to an executive at a large steel mill. Restrictions on production are strict, but there is still the possibility of a government stimulus, while producers are wary of making iron ore purchases given the risk of further price falls, said the executive, who asked not to be identified because not is authorized to speak. to the media. The rise in the price of metallurgical coal has also made hedging difficult for steel mills.
As demand declines, miners rush to export iron ore to meet year-round targets. Vale SA’s shipments increased 12% week-over-week, and shipments from Brazil are expected to continue increasing through the end of the year, according to UBS vessel tracking data. Port inventories, with a use value of 41 days, have pushed prices down, the bank said in a report Tuesday.
The bearish outlook for iron ore has led UBS to cut its sell recommendation on Fortescue Metals Group Ltd. and Vale. A smaller Australian producer was forced to suspend operations right after a shipment.
Still, large miners remain profitable: mining costs at Rio Tinto, for example, were between $ 18 and $ 18.50 a tonne this year.
“Today’s price, given where the Australian producers’ cost base is located, is still a very good price,” said David Radclyffe, senior mining analyst at Global Mining Research Pty Ltd. “It wouldn’t have been long ago. time when I would have said that this is a good price for those producers ”.
The Singapore contract rose to $ 107 a ton, before trading at $ 106.40 at 6:04 pm local time. Iron ore futures on the Dalian Commodity Exchange closed 6.3% higher, and steel futures in Shanghai rose as trading in China resumed after a two-day public holiday.
© 2021 Bloomberg