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Bulk Buys: As China emerges from holiday cocoon, have we seen the bottom for iron ore prices yet?
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- Iron ore prices fell over 25% in the September quarter, according to S&P Global Platts
- Where they fall will be heavily dependent on “Covid Zero” policy decision at this month’s Communist Party congress
- In coal world, Dalrymple Bay ups prices and Glencore settles record thermal supply contract with Tohoku Electric
Data from S&P Global Platts, the main benchmark provider for iron ore prices, shows the asking price for Australia’s biggest export product fell 25.17% to US$95.95/dmt in the September Quarter.
When measured against the surge iron ore miners enjoyed in the first quarter, when benchmark 62% Fe iron ore prices rose to as high as US$163.50/t, the IODEX has slipped some 64.99%.
S&P says, citing the relatively obvious, that China’s Covid Zero policy and property woes, including unusual mortgage strikes from home owners faced with unfinished houses and apartments, is at the heart of the cool down.
“With China’s property slump and pandemic resurgence putting a lid on hopes for demand recovery, iron ore prices in Asia will continue to grind lower in the fourth quarter as steel production cuts intensify during the winter season,” S&P says.
“China’s property sector had a turbulent last quarter, with default of loans from buyers and developers a common occurrence, slowing private residential construction in the country.
“The country’s stringent pandemic curbs in an effort to stamp out every COVID-19 outbreak only aggravated the pain for the iron ore market, as construction activities took a toll.”
Chinese steel mills ease their focus on quality
That has seen some interesting shifts in the market for iron ore.
The long term case for high grade premiums as the steel industry gets greener is pretty sound.
It is one the biggest miners, including BHP (ASX:BHP), Rio Tinto (ASX:RIO) and Fortescue (ASX:FMG) clearly believe in.
BHP is now the largest producer of lump on the planet after the opening of South Flank and made product quality a priority over the pace of its planned decade-long expansion from 290Mtpa to 330Mtpa the focus of a recent investor visit to its Pilbara iron ore mines.
Rio Tinto is pushing ahead with plans to form part of the story at Guinea’s Simandou due to its super high grades, despite ESG and market concerns around the West African super mine’s development.
And Fortescue has run well over its initial budget to get the 22Mtpa Iron Bridge mine near Port Hedland, one of Australia’s largest magnetite operations, up and running within this financial year.
But as with the run in fossil fuels and coal-fired power this year, the shift will be an uneven one, and lower quality iron ores have narrowed their trading gap to mid-grade and premium products after seeing their profit lines fall to around US$70/t at the start of the September Quarter.
Convenience and business logic will at times impede the transition to higher quality ore.
Impurity penalties for high alumina, silica and phosphorous levels are still there but have fallen from March highs in some cases of upwards of US$8/t to between US$4 and US$2/t.
The spread between 65% and 62% Fe ore narrowed to US$10.5/dmt on July 26, down from an all-time high of US$35.50/t a year earlier.
And lump premiums pulled back to an all time low of US4.8c/dmtu before rebounding at the end of September to 19.75c/dmtu.
Which way will the penny fall?
Where iron ore goes from here remains uncertain.
Prices remain extremely profitable for the majors at ~US$96/t yesterday.
Restocking demand and environmental concerns supported lump demand towards the end of September, S&P said, but margin issues could hamper that going forward.
Daily steel output was strong to end September and fell just 0.7% to 2.89Mt/day in early October according to MySteel. The consultancy expects iron ore demand to remain strong in China across October despite low mill margins, with port stocks of 129.6Mt on Monday at a three-month low.
The question of where China will place environmental curbs on steel factories could also be a factor in prices for the rest of the year.
Not all steels are made equal as well. Construction demand is high in China, driven by infrastructure support packages, with rebar performing better than the manufacturing reliant hot rolled coil product.
“China’s steel mill margins, a key driver of iron ore prices in the short‑run, have entered this week on a mixed footing. Steel rebar, which is used predominantly in construction, has remained modestly profitable since early September,” Commbank mining analyst Vivek Dhar said in a note.
“However, margins in hot‑rolled coil production, which is biased towards manufacturing, still remains slightly loss‑making. Hot‑rolled coil production has now remained loss‑making since mid‑August.”
Dhar says the outcome of Covid Zero policy discussions at China’s National Congress starting Sunday should set the direction for iron ore and steel going forward.
“With Chinese cities imposing new restrictions and lockdowns following an increase in COVID‑19 cases following the week‑long holiday, it’s unlikely that a material change to China’s COVID‑zero will be announced this week at the National Congress (beginning on 16 October),” he said.
“Our outlook is further reinforced by the People’s Daily, the Chinese Communist Party’s flagship newspaper, endorsing China’s COVID‑zero over the last two days.
“A gradual easing is on the cards in coming weeks though, potentially leading to a meaningful relaxation of China’s COVID zero rules by the ‘Two Sessions’ policy meeting in March next year.
“Such an outcome would allow China’s commodity demand to start picking up in 2023. Iron ore and base metals are most likely to benefit if China pivots on their COVID‑zero strategy.”
ASX iron ore stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | 1 WEEK RETURN % | 1 MONTH RETURN % | 6 MONTH RETURN % | 1 YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| ACS | Accent Resources NL | 0.025 | 0% | -40% | -58% | -55% | $ 11,650,682.08 |
| ADY | Admiralty Resources. | 0.008 | -11% | -27% | -53% | -47% | $ 10,428,633.22 |
| AKO | Akora Resources | 0.19 | -5% | -7% | -45% | 0% | $ 12,064,419.36 |
| BCK | Brockman Mining Ltd | 0.021 | -13% | -25% | -51% | -51% | $ 194,884,874.75 |
| BHP | BHP Group Limited | 39.92 | 0% | 5% | -13% | 18% | $ 202,227,556,595.52 |
| CIA | Champion Iron Ltd | 5.15 | 0% | -4% | -32% | 8% | $ 2,663,544,598.90 |
| CZR | CZR Resources Ltd | 0.013 | -17% | -26% | 66% | 48% | $ 45,322,202.60 |
| DRE | Dreadnought Resources Ltd | 0.086 | -9% | -28% | 100% | 121% | $ 261,657,885.39 |
| EFE | Eastern Resources | 0.038 | -5% | 36% | -27% | 3% | $ 39,672,967.25 |
| CUF | Cufe Ltd | 0.015 | -17% | -25% | -55% | -63% | $ 14,491,685.48 |
| FEX | Fenix Resources Ltd | 0.255 | 0% | 4% | -12% | 9% | $ 148,847,049.60 |
| FMG | Fortescue Metals Grp | 17.24 | 0% | -3% | -19% | 15% | $ 53,081,355,186.32 |
| FMS | Flinders Mines Ltd | 0.6 | -3% | -8% | 20% | -24% | $ 101,309,146.20 |
| GEN | Genmin | 0.23 | -6% | 5% | 31% | 18% | $ 65,156,205.50 |
| GRR | Grange Resources. | 0.77 | 5% | -9% | -40% | 48% | $ 891,150,797.46 |
| GWR | GWR Group Ltd | 0.068 | 0% | -23% | -56% | -53% | $ 21,842,732.54 |
| HAV | Havilah Resources | 0.3 | 0% | -13% | 54% | 58% | $ 94,991,763.00 |
| HAW | Hawthorn Resources | 0.089 | 0% | -9% | -23% | 51% | $ 29,682,889.56 |
| HIO | Hawsons Iron Ltd | 0.365 | -8% | -30% | -12% | 351% | $ 270,484,326.75 |
| IRD | Iron Road Ltd | 0.13 | -10% | -7% | -35% | -45% | $ 103,981,969.52 |
| JNO | Juno | 0.1 | 0% | -9% | -23% | -26% | $ 13,565,800.10 |
| LCY | Legacy Iron Ore | 0.019 | 6% | -5% | -32% | 36% | $ 121,729,697.78 |
| MAG | Magmatic Resrce Ltd | 0.115 | -12% | -38% | 39% | 15% | $ 30,185,981.77 |
| MDX | Mindax Limited | 0.059 | 0% | 0% | 0% | 18% | $ 115,533,663.12 |
| MGT | Magnetite Mines | 0.0245 | -6% | -2% | -20% | 2% | $ 92,898,476.77 |
| MGU | Magnum Mining & Exp | 0.036 | 13% | 6% | -58% | -45% | $ 19,187,671.18 |
| MGX | Mount Gibson Iron | 0.425 | -1% | -2% | -34% | -10% | $ 516,128,216.53 |
| MIN | Mineral Resources. | 72.78 | 4% | 2% | 23% | 62% | $ 13,812,210,234.00 |
| MIO | Macarthur Minerals | 0.15 | -17% | -6% | -64% | -63% | $ 24,848,023.20 |
| PFE | Panteraminerals | 0.125 | 25% | 2% | -26% | -59% | $ 6,437,640.00 |
| PLG | Pearlgullironlimited | 0.025 | -7% | -19% | -70% | -82% | $ 1,372,557.70 |
| RHI | Red Hill Iron | 3.41 | 1% | -10% | 3% | 6% | $ 217,653,988.09 |
| RIO | Rio Tinto Limited | 96.9 | 1% | 3% | -18% | -5% | $ 35,970,851,136.60 |
| RLC | Reedy Lagoon Corp. | 0.014 | -7% | -13% | -58% | -36% | $ 7,803,976.77 |
| SHH | Shree Minerals Ltd | 0.013 | 44% | 63% | -13% | 44% | $ 16,100,329.60 |
| SRK | Strike Resources | 0.11 | 25% | 17% | -15% | -12% | $ 29,700,000.00 |
| SRN | Surefire Rescs NL | 0.013 | 0% | -19% | -19% | -7% | $ 20,557,725.20 |
| TI1 | Tombador Iron | 0.031 | 7% | 19% | -14% | -31% | $ 66,246,453.56 |
| TLM | Talisman Mining | 0.14 | 8% | -13% | -18% | -3% | $ 26,283,529.58 |
| VMS | Venture Minerals | 0.025 | 0% | -4% | -58% | -50% | $ 41,936,439.80 |
| EQN | Equinoxresources | 0.14 | -3% | -10% | -32% | 0% | $ 6,300,000.14 |
| AMD | Arrow Minerals | 0.0045 | -10% | 13% | 0% | -36% | $ 9,151,942.92 |
Dalrymple Bay surges on coal deal
The owner of the major export terminal for Bowen Basin coal producers, Dalrymple Bay Infrastructure (ASX:DBI), will receive $61m in back payments and bump up distributions to shareholders by 10% after winning a new 10-year agreement on terminal charges.
The deal, which comes after DBI won the right to negotiate directly with customers rather than through the Queensland Competition Authority, will increase the Terminal Infrastructure Charge for users by 23% and 28% respectively to $3.02/t and $3.18/t in FY22 and FY23, with prices to escalate annually for inflation.
It will mean a fatter dividend cheque for investors, who unsurprisingly sent DBI shares 6.2% higher yesterday to $2.23.
DBI expects the dividend for this year to total 20.1cps in quarterly distributions, 10% higher than FY22.
“The successful completion of the commercial negotiations with our customers under the light-handed regulatory framework approved by the Queensland Competition Authority in 2021 is great news for all stakeholders,” DBI MD and CEO Anthony Timbrell said.
“The agreements are the result of a comprehensive negotiation process and the first to be settled under the new negotiate-arbitrate regime. DBI would like to take this opportunity to thank all its customers for their patience and constructive approach to discussions over recent months.”
It comes with thermal coal prices near record highs, though those have fallen in recent days from above US$400/t to around U$385/t for 6000kcal energy coal out of Newcastle.
Those prices remain extraordinarily high, with S&P reporting Glencore and Japanese customer Tohoku Electric have settled their annual contract for Australian coal yesterday for a record US$395/t FOB on a 6322kcal/kg basis.
Considered an industry benchmark, the contract was settled in mid 2021 at just US$109.97/t FOB.
The recent fall in the energy coal spot price has reduced the unusual inverted gap — once over US$150/t — between thermal and coking coal, with premium hard coking coal futures fetching US$276.80/t yesterday.
ASX coal stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | 1 WEEK RETURN % | 1 MONTH RETURN % | 6 MONTH RETURN % | 1 YEAR RETURN % | MARKET CAP |
|---|---|---|---|---|---|---|---|
| NAE | New Age Exploration | 0.008 | 0% | 33% | -43% | -27% | $ 11,487,191.28 |
| CKA | Cokal Ltd | 0.235 | 0% | -4% | 38% | 34% | $ 221,240,510.30 |
| NCZ | New Century Resource | 1.24 | 11% | -16% | -44% | -47% | $ 162,428,484.12 |
| BCB | Bowen Coal Limited | 0.33 | -6% | -16% | 6% | 74% | $ 510,682,758.96 |
| LNYDA | Laneway Res Ltd | 0.24 | 20% | 0% | 0% | 25% | $ 40,823,072.16 |
| GRX | Greenx Metals Ltd | 0.26 | -5% | 21% | 30% | -11% | $ 65,941,320.64 |
| AKM | Aspire Mining Ltd | 0.094 | -6% | 0% | 2% | -6% | $ 47,717,876.59 |
| AVM | Advance Metals Ltd | 0.012 | 0% | 0% | -29% | -33% | $ 5,734,528.82 |
| AHQ | Allegiance Coal Ltd | 0.055 | -14% | -41% | -85% | -89% | $ 23,090,107.70 |
| YAL | Yancoal Aust Ltd | 6.02 | -2% | -13% | 23% | 46% | $ 7,949,045,410.74 |
| NHC | New Hope Corporation | 6.6 | -1% | 19% | 72% | 147% | $ 5,752,822,290.60 |
| TIG | Tigers Realm Coal | 0.015 | -12% | -21% | 0% | -50% | $ 196,000,535.52 |
| SMR | Stanmore Resources | 2.58 | 12% | 12% | 49% | 149% | $ 2,325,564,780.84 |
| WHC | Whitehaven Coal | 10.37 | 6% | 19% | 131% | 202% | $ 9,640,974,056.83 |
| BRL | Bathurst Res Ltd. | 0.9 | -1% | -1% | -11% | 1% | $ 172,223,802.00 |
| CRN | Coronado Global Res | 1.935 | 5% | 18% | -2% | 30% | $ 3,243,937,967.55 |
