(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
LAUNCESTON, Australia, March 23 It's taken a
while but the iron ore market is finally getting the reality
check it needed, although the Chinese part of the market still
looks like it requires a bigger dose.
Spot iron ore .IO62-CNI=MB fell to $84.99 a tonne on
Wednesday, down 10.4 percent since its peak this year of $94.86,
reached on Feb. 21, although it is still up 7.7 percent so far
The most-actively traded iron ore futures contract on the
Dalian Commodity Exchange (DCE) fell to 677.5 yuan ($98.37) a
tonne on Wednesday, a drop of 6.9 percent since its peak so far
this year of 727.5 yuan on Feb. 21.
However, the DCE contract is still up 22.2 percent so far
this year, indicating that while it has started to correct, the
process still has likely some way to go.
This can be seen by looking at the gap between the spot
price for cargoes delivered to China and the DCE price, the
latter of which is driven by small investors and day traders who
often respond differently than the end-user buyers and sellers
that participate in the spot market.
In U.S. dollar terms, the DCE contract was at $105.73 a
tonne at its 2017 peak on Feb. 21, a premium of $10.87, or 11.5
percent, to the prevailing spot price.
The premium had actually widened by Wednesday to $13.50 a
tonne, or 15.9 percent, showing that while DCE futures have lost
some ground, they are lagging well behind the correction in the
In U.S. dollar terms the DCE contract traded at a discount
to the spot price in 2014, 2015 and for most of 2016, flipping
only to a premium around August last year, before narrowing to
parity by December.
However, the DCE's premium to the spot price has blown out
so far this year, giving credence to the view that there was
speculative froth in the Chinese domestic market.
It's also worth noting that the current correction in prices
is happening without any real change in the underlying narrative
of the Chinese iron ore and steel markets.
The outlook for 2017 is still fairly healthy for
infrastructure and property in China, although this has been
tempered by concern over a possible trade slowdown because of
the protectionist leanings of new U.S. President Donald Trump.
RECORD MARCH IRON ORE IMPORTS?
On the data front, it appears that China's iron ore imports
will be high again in March, continuing their recent strength.
Vessel-tracking and port data compiled by Thomson Reuters
Supply Chain and Commodity Forecasts show that an estimated
97.79 million tonnes of iron ore is due to, or has already,
arrived at Chinese ports in March.
If the actual number is close to this estimate, it would be
a record for monthly imports, and above the customs figures of
83.49 million tonnes in February and 92 million in January.
The vessel-tracking data typically comes in below the
customs numbers, but even if the final numbers are below the
current estimate, it's still likely that March will be an
exceptionally strong month.
The point of concern in the prevailing market narrative is
the level of port stockpiles in China SH-TOT-IRONINV, which
rose to 131 million tonnes in the week to March 17, up from
113.9 million at the start of this year, and 65 percent above
the low of 79.4 million recorded in mid-2015.
The level of inventories has been one factor regularly cited
by market analysts as to why iron ore prices must inevitably
decline, a process that finally appears to be
While it's always difficult to predict how far prices will
drop, it does seem the ongoing correction is likely to be
steeper for the DCE futures than for the spot price, and the
Singapore Exchange contracts, which are based on the spot
The SGX futures curve is indicating a price of
$65.89 a tonne for the contract expiring in December this year,
a level closer to what many analysts would deem fair value.
But a measured decline to those levels would be unusual,
given the recent history of price spikes and slumps in iron ore.
($1 = 6.8875 Chinese yuan renminbi)
(Editing by Christian Schmollinger)