(The opinions expressed are those of the author, a columnist for Reuters.)
* China's seaborne iron ore imports vs. SGX price: tmsnrt.rs/3fyT8oX
By Clyde Russell
LAUNCESTON, Australia, July 16 (Reuters) - Spot iron ore for delivery to north China is trading near the highest levels in a year, but its stellar performance is starting to look stretched as some of the drivers of the rally start to moderate.
Benchmark spot 62% iron ore MT-IO-QIN62=ARG, as assessed by commodity price reporting agency Argus, ended at $112.15 a tonne on Wednesday, just down from $112.40 the prior day, which was the highest since August last year.
The spot price is up 23% since the end of last year and a remarkable 41% since this year’s low of $79.60 a tonne, reached on March 23 at the height of concerns over the spread of the novel coronavirus in China, the world’s largest steel producer and buyer of more than two-thirds of global seaborne iron ore.
The gain in the spot price has been exceeded by the main Chinese domestic price, the Dalian Commodity Exchange’s futures contract, which has risen 45% in local currency terms since the end of last year, and 64% since the closing low of Feb. 10.
Iron ore’s strong performance in the face of an unfolding global recession has been largely built on two factors, namely strong steel production in China as Beijing works to stimulate the economy’s recovery, and fears about supplies being cut from number two exporter Brazil, one of the countries worst hit by the pandemic.
Both of these were valid reasons to support the strong rally in prices witnessed in the previous few months, but the question is whether they are still strong enough to justify further gains.
Looking at supply and it seems that the fears over Brazil have so far been worse than the reality.
Some 29.4 million tonnes of iron ore departed Brazilian ports in June, according to Refinitiv vessel-tracking and port data.
This was up from 24.6 million tonnes in May and just lower than the 30.5 million from June last year.
Brazil has exported more iron ore every month since January, and early estimates suggest that July may see an increase over June’s volumes.
The average of exports over the last six months of 2019 was 30.9 million tonnes per month, meaning Brazil is currently close to matching what could be seen as its recent usual level of shipments.
Number one exporter Australia also put in a strong performance in June, shipping 83.1 million tonnes, up from 77.1 million in May and the strongest month in Refinitiv records dating back to September 2017.
While it is a distant third to the big two, South Africa’s exports also appear to be recovering, although this is more a story for July, with Refinitiv estimating that it will export 6.9 million tonnes this month, up from 3.8 million in June and 4.1 million in May.
The bulk of June-loading cargoes from Brazil and South Africa will only arrive in China, or other Asian destinations, in July, and even vessels from the main ports in Western Australia state tend to take at least 10 days to reach China.
What the data shows is that supply issues are becoming less of a concern, and while there is still a risk that the coronavirus affects shipments from Brazil, so far, this hasn’t been the case.
The other side of iron ore has been strong Chinese demand, and that certainly seems to be an ongoing story.
June daily steel output hit a record high of 3.05 million tonnes, up from 2.98 million in May, according to official data released on Thursday.
But there are reasons to be cautious about steel output and demand in the coming months, with the main risk being the contraction in profit margins at Chinese mills.
A survey of 91 blast-furnace mills by consultancy Mysteel showed profits shrank last month, with the main rebar margin falling by 163 yuan ($23.29) a tonne to just 92 yuan.
It’s likely that the rising price of iron ore in July has seen margins drop further and the closer they come to the point where rebar is loss-making, the more likely that blast furnace utilisation rates will start to ease back.
Another factor to watch is iron ore inventories at Chinese ports, with data from consultancy Steelhome showing stockpiles rising from a 44-month low of 107.8 million tonnes in the week to June 12, to 109.7 million by July 3.
While this is hardly a surge, it does show that inventories are starting to rebuild, which may ease the concern some steel mills and traders have about supply.
There’s also the risk of slower construction in China in coming months, given the chance of disruption from the recent heavy rains and flooding in some parts of the country.
Overall, there is little reason to expect a dramatic pullback in iron ore prices, rather what is happening is that the drivers of the recent rally are losing some momentum.
Editing by Richard Pullin