Bulk Buys: Are booming iron ore prices real or are they a bet on a future we’ll never see?
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Iron ore has surprised as one of the sturdiest commodities in a year when the fashionable and ‘future-proofed’ like lithium and graphite have stumbled.
Now trading in the vicinity of US$130/t it’s been a tour de force of endurance for the old world metal, as weakness in China’s property sector and concerns around carbon emissions that should logically have sent prices of the Pilbara fortune maker falling have held little sway.
Instead major investment banks like Goldman Sachs, UBS and JPMorgan have turned bullish, ramping iron ore forecasts for 2024 in the direction of US$110/t, highly profitable for the big boys and not too shabby for the marginal producers.
GS, for instance, now sees a material deficit in 2023, having previously projected a 68Mt surplus.
It says supply is faltering, partly out of Australia but especially from Vale in Brazil, which kicked off the latest bull run in iron ore when it was forced to curtail operations in the wake of the Brumadinho dam disaster in January 2019.
Whether other bears like RBC change their tune remains to be seen.
Commbank’s Vivek Dhar thinks price increases remain firmly within the realm of sentiment.
“The increase in prices has been attributed to stabilisation hopes in China’s property sector (35‑40% of China’s steel demand) and the prospect of additional infrastructure investment in China (20‑25% of China’s steel demand),” he said.
“The trajectory of China’s property sector remains one of the key uncertainties facing the iron ore market. Medium and long‑term loans to households in China, a proxy for mortgages, slowed noticeably last month from September.
“To put the increase in the mortgage proxy in context, the October result was the seventh lowest monthly increase in the last decade.
“Much of the hope for the stabilisation of China’s property sector is tied to measures being put in place to boost activity.”
That includes things like price limits on land auctions, which have been removed across 16 major Chinese cities.
Though Dhar thinks stabilisation remains someway off.
After falling 39% in 2022, China’s new home starts by square metres fell 24% in the first three quarters of the year.
“It’s hard to see how new home starts can turn around in the short term,” he said.
“We’ll get an update on the state of China’s property sector when activity and investment data is released tomorrow for October.”
Chinese policymakers are clearly upping their investments on infrastructure. Dhar notes the fiscal deficit ratio increased from 3% in March to 3.8% in late October and Government bond sales made up 85% of the month on month credit growth last month in China, the world’s largest steelmaker and iron ore price setter.
But he warned prices at current levels remained fragile.
“Current iron ore prices suggest that markets are betting on stronger future demand than current conditions. And that presents a key downside risk, particularly if that demand isn’t realised,” he said.
“To put the current situation in context, steel mill margins for steel rebar and hot rolled coil production have been negative since 21 September and 7 September respectively.”
There’s another big factor in play here, which is that Chinese steelmakers have been underperforming when it comes to the shift from blast furnace to EAF steelmaking.
That’s a critical step to making its steel sector greener.
Each tonne of crude steel produced with scrap via the EAF route also pumps out 0.5t of CO2 emissions.
Blast furnaces, using iron ore and coal, clock in at four times that.
But scrap has been in short supply recently, while high power prices have also aided in China’s consumption fall over the past three years, Westpac’s Justin Smirk said in a note.
“This is somewhat surprising as we would expect the supply of scrap to be lifting and the resulting increase in iron ore demand has resulted in a tighter iron ore market,” Smirk said.
“This has resulted in a greater reliance on blast furnaces (BF–BOF), compared to electric arc furnaces (EAF), which is at odds with President Xi’s pledge in 2020 ‘to have CO2 emissions peak before 2030’ and with the announced targets in the steel industry’s 14th 5Yr Plan.”
Smirk thinks economics is the driving force behind the shift in dynamics (or lack thereof). As the steel industry steps in line with China’s Emission Trading System (expected around 2025 according to Smirk), that could see more scrap displace iron ore as a source materials for the steel sector.
“With the EU’s CBAM (Carbon Border Adjustment Mechanism) coming into effect from 2026 there will be much greater pressure on the Chinese steel industry to lower the carbon content of the steel it exports to the EU,” Smirk said.
“It is likely that on joining the ETS, China’s steel industry would receive free allocations of carbon that, over time, would be reduced thus driving up the cost of carbon for BF–BOFs and increasing the appeal of EAFs.
“This would see the relative competitiveness of scrap steel improve. While scrap consumption is likely to be stable through 2024 it should start to lift around 2025/2026.”
Westpac thinks 62% Fe iron ore prices will average US$121/t in the December quarter but fall to US$88/t by the December quarter in 2024.
Late yesterday Glencore emerged as the obvious but successful buyer of Canadian major Teck’s steelmaking coal business, paying US$6.93 billion to claim a 77% share of Elk Valley Resources.
It will share those operations with international steelmakers Nippon Steel Corporaton (20%) and POSCO, and assume a US$250-300m loan from Tech to Elk Valley in a deal valuing the British Columbian assets at US$9 billion.
The agreement follows hot on the heels of BHP’s (ASX:BHP) US$4.1 billion sale of its Daunia and Blackwater mines in Queensland to Whitehaven Coal (ASX:WHC) in a demonstration of the continued attractiveness of met coal, currently fetching over US$300/t.
Its energy-burning cousin thermal is less pretty, currently going for around US$120/t.
Glencore, which like Teck wants to make base metals and battery metals its primary focus, is planning to spin off its Australian, Colombian and South African coal mines alongside the newly acquired Elk Valley assets in Canada to create a standalone coal miner separated from its battery and base metals and trading arms.
“Glencore intends for the demerged company to continue to oversee the responsible decline of its thermal coal operations in line with Glencore’s current targets and ambition to achieve net zero by 2050, with a supportive policy environment, and to adopt the climate transition strategy for the EVR business that will be developed and implemented pursuant to Glencore’s ICA commitments,” Glencore said in a statement.
The sale of the coal business will also buffer Teck’s balance sheet as it charges into a planned expansion as a copper miner.
“This transaction will be a catalyst to re-focus Teck as a Canadian-based critical minerals champion with an extensive portfolio of copper growth projects, unlocking the full value potential of the company,” said Teck president and CEO Jonathan Price.
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Now one from the margins of the bulk mining field, AKORA Resources (ASX:AKO), which yesterday released a scoping study on its Bekisopa iron ore project in Madagascar.
While there is plenty of enthusiasm around African iron ore, largely that has centred around Guinea and Gabon in the continent’s west.
A scoping study released yesterday suggests the company could economically operate a small five-year mine, peaking at 2Mtpa, shipping DSO iron ore with a grade of 64% Fe in year 1 and 61% across its life.
AKORA projects it can rake in US$545 million in revenue for its endeavours at C1 operating costs of just US$45/wmt, a little over double that of the Pilbara majors, generating pre-tax operating cash flow of US$270m.
That would come at an up front capital cost of US$55.3m, but is based off a resource in its southern zone of just 4.4Mt. AKORA is investigating plans to access more of the project’s 194Mt inferred resource to pursue a longer term operation shipping a 2mm fines product or low-impurity iron concentrate suited for low emissions steel mill.
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