Bulk Buys: Iron ore was the surprise packet of 2023. Will it continue to shock in 2024?
After years of hearing about green steel, high grade iron ore and sustainable premiums, it was bargain barrel, low grade iron ore that really shined in 2023.
As the world continues to search for ways to hit emissions reduction targets in a notoriously filthy industry — steel production is hard to decarbonise and accounts for 8% of global CO2 emissions — pragmatism took over the Chinese steelmakers whose demand for iron ore sets the price of Australia’s biggest export commodity.
Steel makers operated on thin margins amid timid demand from a still struggling Chinese property sector, long the lifeblood for iron ore.
But ironically China was on track to increase its steel output slightly for the first time since, hitting a record in 2020, thanks largely to massive export demands for Chinese steel.
To do that it bought up a heap of additional low grade iron ore, with high coking coal prices also keeping Chinese steelmakers’ eyes on the need to trim spending elsewhere, compressing discounts for product below the 62% Fe benchmark.
And with supply from Brazil and Australia struggling to meet expectations, iron ore prices increased almost 30% to ~US$140/t by the end of the year.
Fortescue, which largely sells product grading beneath the lowest traditional index of 58% Fe, drew realisations of 87% to the Platts 62% Fe IODEX in the September quarter. That compared to December 2021, when it saw just 68% realisation.
“For iron ore, don’t discount low grade iron ore because it will still be very important for the main market China and at the same time, the blending with high grade iron ores from Brazil will still remain very important and very economical for the Chinese steelmakers,” Paul Lim, Fastmarkets regional editor Asia, told Stockhead.
It’s not only FMG benefitting from narrower discounts for low grade iron ore.
It has opened a window for smaller players targeting that end of the market like CZR Resources (ASX:CZR), which ended the year in a trading halt pending what looked like a potential deal with fellow Pilbara iron ore junior Strike Resources (ASX:SRK).
Rio Tinto (ASX:RIO) has also stated it expects to produce elevated volumes of its lower grade SP10 fines and lump products until it can develop the higher grade Rhodes Ridge mine later this decade.
Meanwhile Mineral Resources (ASX:MIN) is planning to bring online the long delayed Onslow Iron project later this year, a holdover from the latter stages of the late 2000s and early 2010s iron ore boom.
CRU Group analysts say rising supply of lower grade iron ore products could impact prices in 2024 despite low mill margins continuing to incentivise low grade iron ore purchasing.
“While demand for low-grade ore will remain steady, supply is expected to increase. Rio Tinto’s quality struggles will persist and Mineral Resources’ Red Hill project will add new low-grade volumes from the Pilbara,” analysts led by Liz Gao wrote last month.
“In our view, low-grade supply will rise more than demand and result in low-grade discounts rising from the current low levels of 6%.
“During 2018–2022, the 58% Fe fines price was on average 14% below the 62% Fe price. In other words, the low-grade market will not be as strong as it is in 2023 Q4, and we see a high chance that discounts could be rising in 2024 H2.”
They say low inventories in China remain an upside risk, especially if there are unexpected supply shocks.
At this point however, the big four producers in Rio Tinto, BHP (ASX:BHP), Fortescue (ASX:FMG) and Vale are all expecting to grow production, pending the impact of the wet season in Brazil and the Pilbara.
What has shocked many onlookers this year is just how strong iron ore has been, given it remains many multiples of the roughly US$20/t cost base of the Pilbara majors.
Lim said there was a sense in the market that prices had run ahead of steelmaking fundamentals, with spikes particularly attributable to optimism about a 1 trillion Yuan plus stimulus measures expected to be rolled out in China.
Despite that expected stimulus support, Lim says it is unlikely we will see a major change in demand from the property sector immediately in 2024.
“The usual winter restocking demand is not present. It just shows how bearish the situation is because the traders and stockists in China they’re just not willing to take the chance to stock up on material because they view that come 2024 the situation will not be much better,” he said.
China has also made noise about curbing steel exports, which ran 35.6% to a six year high of 82.7Mt in the first 11 months of 2023, with other countries’ industries concerned about potential Chinese dumping of cheap material.
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Coal in 2023 meanwhile was an uneven story, with previously hot thermal coal prices chilled by a mild northern winter to drop from almost US$400/t to US$138.10/t last week.
Coking coal prices however, stirred by both strong demand in China after it reopened its borders to Aussie coal and increasing steel production in India, remained strong, trading upwards of US$300/t for much of 2023.
Lim said supply of premium coking coal remains tight, with few investments in new steelmaking coal production.
“In coking coal, the demand from various parts of the world — for example in India after the monsoon season — was very, very strong,” he said.
“And also right now many parts of the world are still very reliant on Australian premium coals, which is why prices were being supported.
“Traders are still willing to bet and take on positions for large physical cargoes of coal, to sell onto the various end users.”
Met coal M&A has been bullish with thermal coal miners looking to diversify into a field with better access to finance and long term prospects.
Whitehaven Coal (ASX:WHC) notably offered up to $6.4 billion to acquire BHP’s Daunia and Blackwater coal mines in Queensland, while Glencore and Nippon Steel paid US$9 billion ($13.15b) for the Elk Valley business in Canada from Teck Resources, with Glencore planning to hive its coal assets in Australia, Colombia and Canada into a separate company.
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