Bulk Buys: Why upside remains for iron ore prices despite the market rout
Mining
Mining
Big iron ore miners were sold off like steak knives yesterday but an iron ore market expert says the fundamentals of weak supply growth and strong demand that drove prices to US$230/t last year are still in place.
Iron ore prices were hammered on Friday after new Covid cases caused localised lockdowns and testing in Shanghai and Beijing just as China’s battered economy looked to be emerging from the shadow of Xi Jinping’s harsh Covid Zero policy.
They tumbled by over 3.5% on Friday, moving from recent highs of ~US$146/t to US$133/t over a matter of days, with Singapore futures for benchmark 62% Fe iron ore slipping 0.77% to US$133.55/t yesterday.
It is a far cry from the highs of May last year, but highly profitable still for most iron ore miners, who saw benchmark prices tumble to a more marginal US$87/t in November after China restricted steel production to restrain the industry’s carbon emissions.
Mark Eames, chairman of iron ore developer Magnetite Mines (ASX:MGT) and a former executive at the world’s largest iron ore companies, thinks the supply side of the market is tighter than many people realise.
He says a small disruption or accelerated demand for steel from a Chinese Government trying to hit an ambitious 5.5% economic growth target through the back half of 2022 could trigger upside for iron ore.
“We’ve already seen steel production at very high levels and I’m certainly not in the business of predicting iron ore prices,” Eames told Stockhead.
“But I think at the moment there is more upside than downside in terms of the current trading conditions.
“If we’re seeing a significant stimulus, or indeed there’s another supply disruption anywhere, the iron ore markets are finely balanced and it would only take either a small disruption on the supply side or a relatively small increment on the demand side to really push those prices up significantly.”
Supply disruptions have already been felt this year with heavy rain in Brazil and Covid cases in Australia hampering first quarter exports in the seaborne market, while Russia’s invasion of Ukraine threatens to take around 30% of the market for high grade DRI pellets out of circulation.
Already steel production has recovered from the 3.5-year lows pretty much enforced by government policy late last year and early this year, when a directive to maintain blue skies over Beijing for Lunar New Year and the Winter Olympic Games kept steel factories at bay.
Stats from a China Iron and Steel Association survey last week suggest steelmakers in the Middle Kingdom, the key factor in global iron ore pricing given China’s 60% share of 60% of world steel production, were producing at rates not seen since last May.
Member mills of the official industry body churned out crude steel at a rate of 2.32Mt/day from May 21-31. If non-member mills were included the CISA estimates that crude steel was flying out of the country’s furnaces at a rate of 3.17Mt/day.
The pace of the recovery in steel production, absent of demand drivers like infrastructure and property investment, has some folk worried the Chinese government could again clamp down on output in the second half of the year.
The Covid response has also hampered both downstream and upstream demand for metals.
“Infrastructure accounts for ~30% of China’s steel consumption and 20‑35% of China’s copper, aluminium and zinc demand,” Commbank analyst Vivek Dhar said.
“Policymakers have eased restrictions for property developers and home buyers in an attempt to stabilise the property construction sector. Despite these policy adjustments, the property construction sector continues to remain under pressure with mortgage demand still very subdued.
“The property construction sector accounts for ~30% of China’s steel demand and 20‑30% of China’s copper, aluminium and zinc consumption.”
While sentiment in markets in general has been bearish in recent weeks, Eames said that may actually show an underlying strength in the supply-demand balance for iron ore.
“What’s interesting is with iron ore prices, we’ve had a period in the last three months where I’d say sentiment globally, in markets has been pretty terrible,” he said.
“We’ve seen large, significant challenges in markets, we’re seeing concerns over the pace of growth. We’ve seen continuing bad news coming out of China and despite that the iron ore price is at relatively high levels.
“I think that’s an indicator that there’s an underlying strength in the iron ore market despite all this negative sentiment, and it wouldn’t take much for that with a little bit of positive sentiment and stimulus as you suggest, for iron ore prices to really feel the upward pressure again.”
Iron ore miners performed terribly yesterday after prices came off, playing a starring role in the bedlam yesterday that saw a more than 4% drop in the ASX 200 costing billions on the local bourse.
Fortescue Metals Group (ASX:FMG), the largest pure play iron ore miner on the ASX, was the worst hit of the big boys, losing more than 8% of its value after threatening a larger slide earlier in the day.
High grade Tasmanian miner Grange Resources (ASX:GRR) was a leaky ship, losing 11.4% of its value.
Pearl Gull Iron (ASX:PLG) was also in the red after a week spent swimming against the tide.
The company is up more than 60% over the past week, recovering some of the hefty losses the stock has felt since listing on the ASX late last year in a $4m IPO at 20c.
Pearl Gull owns tenements on Cockatoo Island in northern WA, the site of BHP’s (ASX:BHP) first iron ore mine in WA back in the 1950s.
Cockatoo is one of two islands off WA’s coast, along with nearby Koolan Island which has historically delivered direct shipping ore at premium grades of 65% or higher, well above the benchmark grade.
That is rare for Australia, though a Chinese company actually owns the historic Seawall Pit mine on Cockatoo Island. Pearl Gull has been drilling over the tenement boundary at its Switch Pit prospect, where the company hit results of up to 56.9m at 68.9% Fe in recent drilling.
Pearl Gull hit some other far more normal grades in other intercepts, though beneficiation test work is under way, with previous hematite from the Seawall deposit having been processed with Wet High Intensity Magnetic Separation to a 66%-plus product.
PLG had no explanation for the ASX on why its shares surged last week, though it did say JORC resource modelling is expected to be finished soon on the Switch Pit deposit.
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 | 0.06 | 0% | 0% | 9% | 20% | $ 27,961,636.98 |
ADY | Admiralty Resources. | 0.013 | 0% | -19% | 0% | -24% | $ 16,946,528.99 |
AKO | Akora Resources | 0.195 | 0% | -9% | -15% | -29% | $ 12,619,388.80 |
BCK | Brockman Mining Ltd | 0.035 | -10% | -13% | -30% | -17% | $ 324,808,124.59 |
BHP | BHP Group Limited | 44.26 | -4% | 8% | 21% | 2% | $ 233,980,577,841.80 |
CIA | Champion Iron Ltd | 6.73 | -12% | 0% | 38% | 1% | $ 3,814,809,644.88 |
CZR | CZR Resources Ltd | 0.017 | -3% | 42% | 143% | 42% | $ 66,240,142.26 |
DRE | Dreadnought Resources Ltd | 0.037 | -5% | -3% | -5% | 42% | $ 105,031,291.39 |
EFE | Eastern Resources | 0.025 | -7% | -29% | -59% | 108% | $ 26,849,789.04 |
CUF | Cufe Ltd | 0.024 | -17% | -8% | -20% | -56% | $ 25,882,533.86 |
FEX | Fenix Resources Ltd | 0.29 | -5% | 4% | 26% | -11% | $ 160,026,315.20 |
FMG | Fortescue Metals Grp | 19.63 | -8% | 1% | 6% | -15% | $ 66,043,797,491.10 |
FMS | Flinders Mines Ltd | 0.43 | -2% | -4% | -19% | -53% | $ 72,604,888.11 |
GEN | Genmin | 0.18 | -5% | -8% | -5% | -22% | $ 53,824,691.50 |
GRR | Grange Resources. | 1.435 | -14% | 18% | 122% | 204% | $ 1,874,888,690.76 |
GWR | GWR Group Ltd | 0.096 | -13% | -26% | -9% | -65% | $ 33,727,748.78 |
HAV | Havilah Resources | 0.275 | -11% | 72% | 57% | 2% | $ 91,392,993.32 |
HAW | Hawthorn Resources | 0.095 | -14% | -17% | -2% | 83% | $ 33,351,561.30 |
HIO | Hawsons Iron Ltd | 0.43 | -22% | -32% | 258% | 202% | $ 350,865,945.50 |
IRD | Iron Road Ltd | 0.15 | -21% | -17% | -27% | -46% | $ 123,843,652.12 |
JNO | Juno | 0.135 | 13% | 29% | 4% | -31% | $ 18,313,830.14 |
LCY | Legacy Iron Ore | 0.021 | -5% | -9% | -22% | 40% | $ 140,950,176.38 |
MAG | Magmatic Resrce Ltd | 0.058 | -16% | -16% | -37% | -57% | $ 16,032,668.27 |
MDX | Mindax Limited | 0.059 | 0% | 0% | 48% | -27% | $ 113,262,163.12 |
MGT | Magnetite Mines | 0.025 | -4% | -7% | 18% | -61% | $ 94,792,406.68 |
MGU | Magnum Mining & Exp | 0.043 | -7% | -30% | -48% | -76% | $ 25,955,363.55 |
MGX | Mount Gibson Iron | 0.615 | -10% | -5% | 52% | -29% | $ 817,133,422.28 |
MIN | Mineral Resources. | 55.56 | -7% | 3% | 14% | 12% | $ 10,748,523,978.27 |
MIO | Macarthur Minerals | 0.26 | -19% | -26% | -31% | -45% | $ 48,376,046.40 |
PFE | Panteraminerals | 0.11 | -21% | -12% | -44% | 0% | $ 6,060,000.00 |
PLG | Pearlgullironlimited | 0.058 | 71% | -3% | -25% | 0% | $ 3,623,552.33 |
RHI | Red Hill Iron | 3.03 | -2% | -20% | -2% | 233% | $ 207,441,484.25 |
RIO | Rio Tinto Limited | 111.05 | -4% | 5% | 13% | -11% | $ 43,023,959,202.60 |
RLC | Reedy Lagoon Corp. | 0.016 | -27% | -36% | -48% | -16% | $ 10,033,684.42 |
SHH | Shree Minerals Ltd | 0.007 | -22% | -30% | -22% | -50% | $ 9,777,895.14 |
SRK | Strike Resources | 0.13 | -19% | -21% | 33% | -41% | $ 39,150,000.00 |
SRN | Surefire Rescs NL | 0.022 | -29% | -19% | 100% | 10% | $ 35,480,522.45 |
TI1 | Tombador Iron | 0.029 | -15% | -15% | -3% | -72% | $ 36,958,361.15 |
TLM | Talisman Mining | 0.15 | -6% | 0% | -3% | -29% | $ 30,038,319.52 |
VMS | Venture Minerals | 0.032 | -18% | -24% | -16% | -79% | $ 58,448,515.72 |
EQN | Equinoxresources | 0.18 | 0% | 24% | -10% | 0% | $ 7,650,000.17 |
The days of plus US$500/t coking coal prices are done, for now at least, with prices dropping back over the past week for steelmaking coal.
According to Fastmarkets MB, Australian premium hard coking coal FOB Dalrymple Bay Coal Terminal was up US$13.89/t on Monday to US$368.11/t, well below recent highs which soared as high as US$670/t in March in the wake of the Russian invasion of Ukraine.
Thermal coal remains a hot commodity in these energy crisis times with 6000kcal Newcastle thermal coal priced at US$392.35/t on Monday.
Coal miners were just as impacted by the market jitters yesterday as the hard rock miners.
Bowen Coking Coal (ASX:BCB) fell 4.3% after a heavy fall in morning trade despite railing the first coal from its Bluff PCI mine in Queensland.
38,000t from the refired operations are booked for export to Taiwan’s Formosa Plastics Group before the end of June from the RG Tanna Coal Terminal at Gladstone.
The new Nick Jorss-chaired producer is aiming to have three more mines up and running to hit a total run rate of 5Mtpa by 2024.
“This is the next significant achievement for Bowen,” BCB managing director and CEO Gerhard Redelinghuys said.
“Our first shipment from Bluff is just the start of our production ramp up. We have a portfolio of quality metallurgical coal developments coming online this year at Broadmeadow East, Burton followed by Isaac River as we work towards our production target of mining 5Mtpa ROM by 2024.”
The company expects demand for its PCI coal to remain buoyant given Russia’s big role in supplying that grade of the steelmaking commodity, a product used as substitute for coke in blast furnace steelmaking.
The Platts ultra low vol PCI index was trading at high price levels of US$348/t on June 10.
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 | 0.006 | -33% | -45% | -40% | -54% | $ 11,487,191.28 |
CKA | Cokal Ltd | 0.125 | -4% | -11% | -11% | 112% | $ 122,063,367.40 |
NCZ | New Century Resource | 1.89 | -10% | -7% | -5% | -44% | $ 263,291,333.13 |
BCB | Bowen Coal Limited | 0.335 | -12% | -8% | 116% | 420% | $ 539,673,733.20 |
LNY | Laneway Res Ltd | 0.004 | 0% | -20% | -30% | -17% | $ 28,359,073.85 |
GRX | Greenx Metals Ltd | 0.21 | 20% | 11% | -2% | -24% | $ 53,260,297.44 |
AKM | Aspire Mining Ltd | 0.088 | 0% | -6% | 17% | 5% | $ 45,179,691.67 |
PAK | Pacific American Hld | 0.011 | -15% | -8% | -39% | -44% | $ 5,734,528.82 |
AHQ | Allegiance Coal Ltd | 0.47 | -16% | -8% | -7% | -38% | $ 208,553,774.90 |
YAL | Yancoal Aust Ltd | 5.5 | 1% | -2% | 123% | 156% | $ 7,526,504,790.90 |
NHC | New Hope Corporation | 3.64 | -8% | 1% | 76% | 96% | $ 3,196,251,194.88 |
TIG | Tigers Realm Coal | 0.018 | -25% | 9% | -5% | 100% | $ 274,400,749.73 |
SMR | Stanmore Resources | 2.18 | -18% | -8% | 130% | 228% | $ 2,100,219,356.34 |
WHC | Whitehaven Coal | 5.13 | -6% | 5% | 111% | 144% | $ 5,424,771,843.18 |
BRL | Bathurst Res Ltd. | 1.2 | -22% | -8% | 58% | 287% | $ 254,508,507.40 |
CRN | Coronado Global Res | 1.765 | -17% | -13% | 59% | 125% | $ 3,160,115,281.05 |
JAL | Jameson Resources | 0.075 | 0% | -4% | 7% | -17% | $ 26,115,248.40 |
TER | Terracom Ltd | 0.755 | -18% | 32% | 308% | 529% | $ 602,886,104.00 |
ATU | Atrum Coal Ltd | 0.008 | -20% | -33% | -69% | -81% | $ 6,222,315.02 |
MCM | Mc Mining Ltd | 0.14 | -7% | -7% | 61% | 33% | $ 31,624,779.20 |