FEATURE: Market divided on iron ore price after hikes

On the morning of February 11, the most traded May iron ore contract on DCE was halted trading immediately after the opening as the price surge hit its daily 8% limit to Yuan 652/dmt ($96.4/dmt), in response to the surge on the most traded March iron ore futures contract on SGX by about 10.4% over last week to settle at $91.54/dmt as of February 8, both of which were to reflect the market concern on supplies with the tailings dam collapse at Vale’s Feijão iron ore complex in Minas Gerais state, Southeast Brazil, on January 25.

SGX March iron ore futures price has been hovering at around $90-91/dmt CFR China until around 3pm on February 11. 

Chinese steel mills having the decisive power?

As for this week, the market situation may not be as clear-cut with China, the world’s top iron ore consumer, being back from the long CNY break, and its reaction to iron ore prices will be decisive, some market sources pointed out.

“China, the contributor to the world’s more than half of steel production, should be having a decisive say on the iron ore prices, and I do not think the over $90/dmt is a comfortable price they are willing to pay with their current steel margins,” a Beijing-based market analyst said.

Prior to the CNY break, Chinese steel mills had been enjoying a Yuan 400-600/tonne steel margin, but it has been greatly lowered to around Yuan 200-300/t level with the surge of $18.43/dmt for the SGX TSI Iron Ore CFR China (62% Fe Fines) Index since January 25 when Vale’s accident happened, according to him.

“A gross profit at Yuan 200-300/t means that some Chinese mills are close to the breakeven level, which will substantially shrink their appetite not only for Vale’s supplies but also the most popular 62% grade fines,” he added.

A Singapore-based iron ore trader also shared the doubt whether the 62% Fe content iron ore price stands the chance to exceed $100/dmt CFR China.

“Some market participants are focusing a lot on the supply disruption from Vale because of the latest accident, and I agree that Vale may not be able to make up for all the lost output from other operating mines, but at the same time, China is still having some stocks at the ports and the steel mills,” he said.

A second Beijing-based source agreed, expecting Vale’s iron ore stocks to be at least 30-40 million tonnes, adding, “do not forget that around 140 million tonnes of iron ore are sitting at the Chinese ports, so I do not think supply issue should be exaggerated.”

How deeply Vale’s supply will be affected?

The latest update from Vale on iron ore capacity affection because of the January 25 accident was on January 29 when it announced to decommission 10 upstream tailings dams in three years, which would affect 40 million tonnes/year of iron ore capacity including the pellet feed to 11 million t/y pellet capacity, though it emphasized that the affection could be offset by higher output from other mines.

A second Singapore-based iron ore trader, however, challenged the accuracy of the estimation, calculating the affection to be a lot higher than the official release basing on all the names of mines mentioned in Vale’s releases over January 25-February 8.

He, therefore, is holding the strong confidence that the 62% seaborne iron ore price will have little problem to surge over $100/dmt CFR China or even higher.

Vale announced to temporarily halt the operations at the Vargem Grande Complex and the Brucutu mine and the force majeure on the latter on February 4-5.

Some other market sources agreed on the underestimation of the capacity affected, though they argued that the duration of the affection to play a crucial role on the actual disturbance to the fundamentals, with some Chinese sources prediction the stoppage to last about three months at maximum.

“Chinese steel mills will be able to cope even if with 40-50 million tonnes of less supply from Vale for some time, but the short-time chaos will be lending some support to seaborne iron ore prices, though many may already feel a bit nervous with the recent breakthrough of $90/dmt CFR China,” the first Singapore market source agreed.

Vale produced 367 million tonnes of iron ore in 2017, with 66 million tonnes blended in Asia including China, according to Vale’s official figures, and China’s iron ore imports from Brazil totalled 230 million tonnes, or 21.4% of the total imports, according to the data from China’s General Administration of Customs.

Index methodology and exchanges’ higher margins contributed to price hikes?

SGX-adopted TSI iron ore pricing index will refer to iron ore swaps for daily pricing index assessment whenever the physical iron ore market is with limited activity or with limited fixed-priced deals, which had been the case during the Chinese New Year holiday on February 4-8 when the Chinese buyers and traders were off for the celebration.

Last week, the Singapore-based GlobalOre was with less than 10 bids and offers for iron ore fines in two and a half of working days, a third Singapore market source shared.

“The index would have been valued as ‘zero’ or flat from the previous day during the CNY period in the past few years, and this year, the physical market has remained quiet, yet the index jumped, while I think index should be reflecting the physical market movement,” the second Singapore source added.

Exchanges including SGX and DCE will raise their margins for iron ore derivatives trading to moderate price volatility and to minimize risks, and SGX is reportedly adjusting its margins twice a month and DCE usually raises its margins ahead of a break, however, the influence may be limited on the iron ore price movement.

Serious investors with quite a bit of open interests should have already been prepared for higher margin calls, as pre-holiday margins adjustment is a common practice, it may have forced some small investors with limited cash flow to close their positions, but that would not have been the major force behind such a big jump on SGX, Singapore sources agreed.

Over January 25-February 8, the SGX iron ore March futures contract saw its trading volume spike twice to 44,050 lots on January 30 and 45,059 lots on February 1, being way higher than its usual less than 20,000 lots/day.

Written by Hongmei Li, li.hongmei@mysteel.com