Bulk Buys: Iron ore futures show strain as China orders 50pc cut in Tangshan emissions
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Chinese demand for imported iron ore eased this week as authorities in China enforced restrictions on steel production to tackle air pollution concerns in the Asian country, and futures prices started to reflect the impact.
Cargoes of 62 per cent-grade iron ore for delivery to China are trading at $US157.10 per tonne ($203.65/tonne) this week, according to Metal Bulletin.
“Reports that restrictions on Tangshan steel output will remain for the foreseeable future continue to weigh on sentiment,” said analysts at ANZ Bank in a report.
A group of seven Chinese steel producers in the Tangshan region east of Beijing have been instructed to reduce their emissions by 50 per cent from late March to June 30.
An additional 16 steel companies in Tangshan have been told to cut their emissions by 30 per cent from late March through to the end of December.
Tangshan’s steel mills account for about 15 per cent of China’s total steel output, and the control measures are forecast to cut Chinese iron ore demand by around 35 million tonnes.
“Given that China accounts for 70 to 75 per cent of the world’s iron ore imports, weaker ore demand in China usually translates through to weaker iron ore prices,” analysts at Commonwealth Bank of Australia said.
Iron ore futures prices are showing signs of strain this week on investor worries about curbs to China’s steel output for the rest of the year.
The Dalian Commodities Exchange’s May-settlement iron ore futures contract traded lower Tuesday at ¥1,020 per tonne ($US156.50/tonne), according to exchange data.
“The sell-off was sparked by restrictions on steel output in Tangshan, which would likely weigh on demand for the steel making raw material,” said ANZ Bank analysts.
“[Iron ore] Futures on the Singapore Exchange threatened to break below $US150 per tonne,” they added.
Delivered-China prices for iron ore are still trading at levels last seen in 2011 at the height of the last commodity boom, and are four times their level at the market’s bottom in 2015.
Prices for iron ore are 12.7 per cent off their recent peak of $US180 per tonne in early March, when Chinese buyers were in a hurry to book cargoes after Lunar New Year holidays.
Australia’s iron ore industry needs a sustained period of higher prices to drive increased investment in the sector to encourage the building of new mine production.
“The hard facts are that the iron ore industry has not been able to significantly expand because of underinvestment,” said iron ore market expert and Magnetite Mines (ASX:MGT) director, Mark Eames.
The sector experienced a devastating hollowing out of its next generation of junior miners in the market rout of 2015 when prices were driven down to $US40 per tonne.
Long lead times are another issue for iron ore miners in Australia, as significant reams of red tape and complicated planning processes can slow down the time taken for approvals.
BHP’s South Flank project, from its pre-feasibility study to first ore production, will take about 10 years because large new mines take a lot of planning and investment, said Eames.
Iron ore exploration companies like Magnetite Mines are trying to reduce the time needed to build new mines by using existing infrastructure such as roads, rail and power.
Magnetite Mines’ Razorback iron ore project in South Australia is intended to hook into surrounding rail, road and power generation infrastructure, Eames said.
“If you build a new mine you need to earn a good return on your capital investment, and one of the reasons for underinvestment is you need higher ore prices to incentivise new mines to be built,” he added.
Mining company Mineral Resources (ASX:MIN) announced this week the start of production at its Wonmunna iron ore mine in WA’s Pilbara region.
Wonmunna is to ramp up to its production capacity of 5 million tonnes per year in the June-ended quarter, and it has the potential to double this to 10 million tonnes per year.
Iron ore from Wonmunna mine will be dispatched from WA’s Utah Point shipping hub at Port Hedland, and can be blended with the company’s other iron ore production.
The addition of Wonmunna iron ore to its product range will boost Mineral Resources’ shipping volume from Port Hedland to 14 million tonnes per year by the end of 2021.
Wonmunna is located 360km south of Port Hedland and was purchased for an undisclosed sum from the Australian Aboriginal Mining Corporation (AAMC) last year.
AAMC shareholders will receive a royalty on the first 40 million tonnes of Wonmunna iron ore extracted and shipped.
Meanwhile, Magnum Mining and Exploration (ASX:MGU) has published a maiden resource for its Buena Vista magnetite project in the US state of Nevada of 232 million tonnes.
The company has spent $34m on developing its magnetite project for the production of a 67 per cent iron magnetite concentrate.
Buena Vista is located 50km from the Union Pacific railway that connects to a number of ports on the US west coast including Stockton, Oakland and San Francisco.
Chinese steel reinforcing bar (rebar) producers this week raised their offer prices after steel mills took steps to reduce their production in response to air pollution measures.
The traded price of Chinese rebar at Shanghai’s steel market has risen by $US5 this week to $US730 per tonne, and is trading at historical highs.
Steel rebar producers are effectively passing on the higher cost of steel billets to their customers, a steel trader in Shanghai told Metal Bulletin.
Estimates of the impact of the steel production cutbacks amount to 27 million tonnes on an annualised basis, which represents about 3 per cent of China’s total steel output.
China is producing steel products at a rate of 1 billion tonnes per year, which represents around half of global market steel production, some of which is exported.
Trading in Chinese steel rebar is mostly driven by activity in China’s construction sector which shows little sign of moderating following large amounts of infrastructure spending.
“Property investment grew by 7.6 per cent year on year in January-February amid an increased focus on containing asset price bubbles,” said analysts at ANZ Bank.
European prices for steel rebar are still trading above $US600 per tonne, at $US622 per tonne, according to the London Metal Exchange rebar futures contract for month-ahead delivery.
There is an apparent arbitrage opportunity for traders in buying steel rebar futures on the LME and selling the product in China that shows a profit of about $US108 per tonne.
Australian hard coking coal for loading into April-arrival ships at ports in Queensland is trading at $US106.25 per tonne this week, according to Metal Bulletin.
Cargoes for spot shipment continue to be sparsely bid as Chinese buyers eye Canadian and Russian cargoes instead, despite producers offering these at higher prices.
“Mills in south China are used to importing North American coking coal and can accept a higher price than mills in north China,” a trader told Metal Bulletin.
A 75,000-tonne cargo of Canadian coking coal with an April shipment date was heard sold to a Chinese buyer at $US203 per tonne on a delivered price basis including freight costs.
This is nearly $US100 per tonne higher than equivalent quality Australian hard coking coal, excluding freight costs of about $US20 per tonne.
Indian buyers, who have recently stepped into the void left by absent Chinese buyers, are maintaining a low profile in the seaborne market.
Many consumers of Australian coking coal in India remain fully stocked after booking cheaper cargoes in January then priced around $US100 per tonne, Metal Bulletin reported.
Flooding hit NSW’s Hunter Valley coal producing region this week, and triggered the closure of the main rail corridor for coal exports to the port of Newcastle.
In addition to this, two shiploaders for loading coal exports into ships at Newcastle port are undergoing repairs and this has slowed shipping operations this week.
“The disruption to coal railway transport in the Hunter Valley comes on top of outages at the Newcastle coal port,” said analysts at CBA in a report.
The majority of coal exports loaded into ships at Newcastle port is thermal coal bound for power stations in Asia, and only a small amount about 20 per cent is coking coal.
Brisbane-headquartered coal company New Hope Corporation (ASX:NHC) gave an insight into the current coal market with its update for the six months ended January.
The company sold 23 per cent less coal from its mines in New South Wales and Queensland in the half-year at 4.9 million tonnes, and revenue was 34 per cent lower at $405.5m.
New Hope achieved an average sales price of $78.80 per tonne, down 19 per cent on the half-year ended January 2020, and its total costs were $63 per tonne.
Japan is the company’s largest export customer, followed by Taiwan, Chile, Korea and China, and it also has some smaller markets in India and Vietnam.
Chief executive, Reinhold Schmidt, said New Hope was witnessing continued demand for its product in Asian markets and positive movements in the coal price as measured by the Newcastle price benchmark for Australian thermal coal.
“The Newcastle 6,000 index has recovered from the lows in 2020 of $US50 per tonne to the current level in excess of $US90 per tonne,” said Schmidt.
After tax profit for the coal company excluding one-off items for the January 2021-ended half year was $800,000, down 99 per cent from $86.4m in the corresponding 2020 period.
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