Commodities | Oct 29 2012
– Iron ore price rebound complete
– Restocking phase may now slow
– Prices expected to drift back until next year
By Greg Peel
For most of the year analysts had decided US$120/t was a reliable floor for Chinese spot iron ore prices. Or failing that, US$110/t would be rock solid. Okay, well it could never fall below US$100/t. Oh dear, we're heading to US$85/t.
Only once iron ore broke triple digits did shell shocked analysts concede a vacuum-style plunge was underway which would see traders and consumers stand aside to see just how cheaply they might pick up fresh inventories. Chinese steel makers had been stubbornly maintaining output all year in the face of falling steel demand in a weaker Chinese economy. Many mills were propped up or forced to remain open, ANZ's analysts note, by provincial authorities, in order to sustain political stability, report good growth figures, please Beijing and so on and so forth. Something eventually had to give.
That something also meant Chinese mills were carrying excess steel inventory, and subsequently port inventories of iron ore were also excessive. These factors helped trigger the price plunge, but the subsequent drawdown and thus reduction in inventories has also served to prompt the sharp price rebound – all the way back to US$120/t from the depths – as has an apparent pick-up in economic activity in the month of September. Fixed asset investment, notes Deutsche Bank, rose a better than expected 20.5% year on year. As quickly as prices had plunged, they rebounded, driven by the rush to replenish at cheap prices as well as trader short-covering.
It's been blink-and-you'll-miss-it stuff, but just as surely as prices fell a bit quickly they have also rebounded at a similar pace, and as the dust settles analysts expect a less volatile drift-back from here.
Deutsche believes the market has again overshot and if there's no ultimate pick-up in actual steel demand from end-users soon then prices are susceptible. Deutsche is also wary of actual steel inventory drawdown levels, citing weak power consumption, stagnant vehicle sales and contracting rail traffic as contradictory signals. The analysts do note, however, that cement production has picked up in China, which may point to a recovery in construction activity, but with the typical winter slowdown approaching and a government unlikely to pump in fresh stimulus pre-transition, Deutsche would not be surprised to see spot iron ore drift back towards the US$100/t level.
ANZ is a little less pessimistic, believing prices will consolidate within the US$110-120/t band. The analysts concur with Deutsche's perceptions but can also add some further colour.
The iron ore price plunged as inventory destocking picked up, creating a rare arbitrage opportunity for traders who could buy imported seaborne ore more cheaply than local supplies. Once this window was exploited, prices rebounded, but now the gap is closing. This rush to pick up imported product also sparked a full 50% surge in bulk carrier freight rates from the beginning of October, ANZ notes, as measured by the Baltic Capesize Freight Index.
As the analysts have highlighted on the above chart, that index has now turned south again. The restocking phase, suggests ANZ, may now be ending.
ANZ believes the fundamentals are nevertheless likely to look more favourable from the second quarter of 2013, when the overhang of Chinese stocks is absorbed and policy initiatives from the new regime become clear. Deutsche concurs, suggesting US$125/t could be seen by mid-year, before another drift-back in the second half.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
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