A Collective Drop of 21% for Iron Ore Futures in June! Will the Trend Extend into July?

SHANGHAI, Jun 23 (SMM) - Entering June, under the influence of the Fed's interest rate hike, the commodity market is muted as a whole, particularly the performance of ferrous products. Among them, iron ore has posted the greatest drop due to its deep internationalisation. As of June 22, iron ore futures has fallen for twelve consecutive days, refreshing the longest period of decline since last year. And as of Monday June 20, the cumulative decline this month was as high as 20.77%, with prices constantly refreshing new lows since March this year. The iron ore futures closed the day (June 22) at 709.5 yuan/mt, down 5.96%.

On the backdrop that terminal demand has remained weak, steel mills have begun to cut the production to contain the losses. The iron ore demand outlook weakens, and steel stocks continue to rise. Will iron ore prices stop falling and stabilise in this context? When will iron ore prices bottom?

Pessimism haunted the market with continuous production cuts

According to SMM research, as of June 22, 24 blast furnaces were overhauled due to the losses, with a daily pig iron production reduction of 76,750 mt. And the demand for iron ore contracted by more than 120,000 mt per day.

There mainly two reasons for this round of production cuts. First, the weak terminal demand is the root cause. The previous domestic pandemic makes the actual demand continue to deteriorate. And with the advent of summer, the rainstorms in the south and other bad weather conditions as well as the off-season further suppress the demand. On the other hand, the steel mills’ profit situation continues to be suppressed with in-plant steel stocks rising, increasing the pressure faced by the mills.

The decline in the demand for iron ore brought about by steel production cuts is already a fait accompli. On top of such a fait accompli, coupled with a tense international environment, like the ongoing rate hike adopted by the Federal Reserve and the European central banks, the overall commodity is under greater pressure, and the pessimism keeps haunting the market.

Iron ore prices may fall further in light of supply-demand imbalance

In terms of the supply or iron ore, according to SMM statistics, shipments from Australia increased again this week by 1.19 million mt to 21.19 million mt; while those from Brazil fell again, but with potential increases in the future. In addition, the major mines overseas will still increase their shipments in order to fulfil their shipment plans by the end of the quarter. The problem of temporary supply tightness is expected to come to an end.

As for port stocks, as of June 17, the 35 ports tracked by SMM had a total of 121.99 million mt of iron ore stocks, down 1.71 million mt from last week and up 490,000 mt from the same period last year. Port stocks have fallen for 12 consecutive weeks. At the same time, the average daily shipments from these ports fell from 3.18 million mt to 2.299 million mt. The speed of decline in port stocks narrowed significantly and it is expected that port stocks may start to accumulate in mid-July.

On the whole, with the weather in Australia and Brazil turning better in mid-June, overseas shipments have now started to increase, and the imported ore arrivals may grow at the end of the month. However, domestic steel mills have chosen to cut the production due to losses, pulling down pig iron production significantly. Coupled with with the 2022 crude steel production reduction policy to be launched soon, pig iron production is difficult to increase.

In the case of sufficient iron ore supply and weak demand, it is expected that demand for iron ore will remain weak in the short term. Considering that the off-season in the steel sector may last until August as well as the less-than-expected new housing starts and automobile production, the demand for finished products is still weak, with heightening possibilities of more steel mill maintenance in the future. It is expected that iron ore prices will still fall in July