Can Iron Ore Increase amid verification Period of Steel Mills Demand?

SHANGHAI, February 10 (SMM) - Since January 2023, the demand for iron ore increased significantly due to pre-holiday restocking and favourable policies in the real estate industry. However, iron ore prices continued to increase amid stagnant downstream demand, which has caused national supervision. As such, iron ore prices fell after rising for nearly three months. However, many provinces continued to lower the proportion of first-home payment during the Chinese New Year holiday and pandemic prevention policy was relaxed, which boosted the expectations for the economic recovery in 2023. As such, the steel mills were more active in production, supporting the iron ore prices. The most-traded SHFE I2305 contract rose sharply to 890 yuan/mt.

Entering February, there was no significant change in supply and demand, and iron ore prices remained volatile. Will iron ore prices continue to rise in the future?

In terms of supply: Amid the rainy season in southern hemisphere, the shipments from Australia and Brazil were greatly affected by heavy rains and hurricanes. According to SMM data, global shipments have been below 30 million mt since New Year's Day, but were basically flat from the same period last year. In addition, due to the impact of the BHP railway accident this week, short-term shipments may decline. The supply of iron ore is still tight.

In terms of demand: Although the current projects have not yet resumed, steel demand is expected to be strong. Steel mills are more active in production amid low inventory. Some blast furnaces resumed from maintenance as planned. According to SMM data, about 11 blast furnaces resumed the production in February, and about 4 blast furnaces newly carried out maintenance. As the demand for finished products recovers, more blast furnaces may resume work. Output of iron ore may increase further, boosting the demand for iron ore.

Price Spread between High and Medium-grade Iron Ore Expanded Further while that between Medium and Low-grade Ore was Stable

In 2023, Brazil's heavy rains led to the extremely unstable vale's shipments and the arrivals of IOCJ were low. Coupled with the winter breaks and the increasing demand for high-quality fines, the prices were firm. The price spread between high and medium-grade expanded significantly. Although the demand for low-grade fines was stable, prices of SSF were suppressed by the increasing India fines. The price difference between medium and low-grade ore narrowed. As of now, the price difference between between high and medium-grade ore expanded 20 yuan/mt to 130 yuan/mt while that between medium and low-grade ore shrank 26 yuan/mt to 130 yuan/mt. In hindsight, the arrivals of IOCJ are unlikely to change in the short term. Affected by mine accidents last year, some mines in Shanxi and Hebei were still under maintenance, hence the supply of domestic concentrate decreased and some steel mills in Shanxi and Hebei increased their purchases of concentrate. According to SMM research, some mines in Shanxi and Hebei that ceased the production for inspection are expected to resume after the Two Sessions. Therefore, the prices of concentrate were still strongly supported. Meanwhile, the prices of low-grade ores such as SSF are expected to rise. And the price difference between high and medium-grade ores may continue to expand in February while that between medium and low-grade ores will remain stable.

 In terms of premiums for pellets and lump ore: In the heating season this winter, the production limit for environmental protection was relatively loose, but the sintering machine was significantly affected and the demand for lump ore declined sharply year-on-year, dragging down the premiums to a low level.

In addition, the domestic production capacity of pellets continued to expand in the past two years, but the supply increased more rapidly, which suppressed the prices. In light of poor profits, some pellet factories stopped the production for maintenance around the Chinese New Year holiday and the supply slightly tightened. As such, the demand for imported pellets increased and the premiums increased slightly. In hindsight, steel mills still mainly use low and medium-grade iron ore amid the slow recovery of downstream demand and the poor profits. Therefore, the demand for lump ore and pellets is unlikely to increase significantly. Amid the seasonal low of Australia's shipments, it is expected that the arrivals of lump ore in February will still be low, and the lump ore premiums may continue to rise. However, after the relaxation of tariffs in India, the supply of pellets has increased, which may drag down the premiums in February.

On the whole, the supply of iron ore in February is relatively stable amid the seasonal low. The fundamentals are strong amid the increasing demand. But the steel demand is still in the off-season. Coupled with the policy supervision, it is expected that the prices of iron ore in February will fluctuate with upside momentum.