• Iron ore futures surged in Dalian yesterday as speculation mounted over Chinese stimulus measures
  • Are the gambles on the iron ore price a hint it is poised to go higher?
  • Steel production controls and rising supply could keep iron ore in check, with RBC seeing US$75/t in 2024


China’s iron ore gamblers are among the boldest in the world, and the high rollers of the Dalian Commodities Exchange aren’t immune to betting on a wild, outside running horse from time to time.

Betting on the price of iron ore, or gold for that matter, is a bit like pushing buttons in Crown. The more you think you have a formula the more likely your third cherry is just a cruelly misshaped apple.

We saw a 5% lift in iron ore swaps overnight to US$105.55/t, but it was on the Dalian exchange where the moves really confounded some of the fundamentals.

The most traded January contract is up some 2.86% again this morning to US$105.88/t after a big surge in afternoon trade that took the punt to its highest level in three weeks.

It’s come despite some bearish commodity moves on the back of bad news about China’s property and infrastructure investment sectors, including the potential default of major developer Country Garden.

Oh, and that was before the news this morning that China’s Evergrande, the property giant whose debt struggles two years ago inspired months of finance bro doom scrolling, had filed for bankruptcy protection in the USA.

That has even flowed through to lithium prices, which have fallen end on end for almost a month as poor consumer sentiment impacts spending on new energy vehicles.

READ: Is your lithium stock having a rough week? China may have something to do with it

Seems bad.

The most obvious reason for the jubilation in the iron ore set is a recent cabinet meeting where Chinese officials led by Premier Li Qiang promised to keep bringing policy online to boost consumption and investment, as per Reuters.

Stimulus measures have done bugger all for commodity demand so far.

Could this be different?


So should you bet the house on iron ore?

The other factor seems to be hopes steel production cuts won’t be as violent as the market previously feared.

“Iron ore futures rose on hopes the recently announced curbs on Chinese steel output would be relatively small,” ANZ’s Felix Ryan said in a note this morning.

“While there were reports of steel mills in Jiangsu being asked to reduce output by 30%,
the edict doesn’t appear to be across the broader industry.

“Major mills in regions such as Hebei remain unencumbered. Even with the recent strong level of steel production, Chinese inventories of rebar steel continue to fall, according to Mysteel data.”

Here’s what China has done in recent years and history shows the Chinese Communist Party is a freaking machine about this thing.

Crude steel output has, since 2020, totalled over 1Btpa — around 57% of the global total.

It peaked in the first year of Covid at 1.065Bt, but authorities have pledged to keep it under the previous year’s level since then, falling slightly to 1.033Bt in 2021 and 1.013Bt in 2022.

Often it overshoots in the first half of the year. That’s what happened in 2021 when prices hit record of US$237/t in May and steel production was running at a rate of over 1.2Btpa through June 30. Not sustainable. Prices fell US$150 in just six months to US$87/t in early November that year.

China produced 535Mt of crude steel in the first half of 2023, 1.3% up YoY. But it’s always planned to produce less steel this year than last.

That would suggest output would need to fall to an average of under 80Mt a month in the back end of the year, down from 91.1Mt in June.

This is normally done under the auspices of environmental controls, often transmitted from the top brass by extension through local authorities.


RBC sees major surplus

That’s one of the reasons RBC sees negativity in iron ore prices through the rest of 2023.

In a note this week London analyst Tyler Broda said “the structural challenges
facing the Chinese economy and constraints to widespread stimulus are likely going to see steel/iron ore demand disappoint.”

“We detail the impact from seasonality and how production curbs could swing the iron ore market balance by ~120mt in H2, leaving the market well oversupplied,” he said.

“We expect prices to fall back to the cost curve support at c.$75-$80/t with transitory risk to the downside.

“Despite this, the iron ore miners are already largely pricing this in, which sees us looking for entry points after negative sentiment/price-linked momentum in the short-term.”

RBC sees prices falling to US$80/t by the fourth quarter and US$75/t in 2024.

“The iron ore market remains in a very challenging structural position as supply continues to grow while global steel markets fade into a deteriorating economic backdrop and the realities of the post-real estate bubble China,” Broda said.

“Our analysis suggests global steel demand is set to fall by 0.5% in 2023 while iron ore supply rises by 3.6%.”

Broda said rebar profit margins in China were now the most negative they’d been in a decade, with sheet product margins also turning negative.

Higher iron ore consumption has been largely propped up by exports and the higher proportion of blast furnace production amid weak electric arc furnace performance (something, by the by, that isn’t good for emissions).

Production controls are expected in the second half to curb emissions and protect producer margins.

“The other mechanism to alleviate margin pressures would be to exert more control over the iron ore market. Centralised buying from the state CMRG and subsidising domestic production could allow for more control on domestic steel margins,” Broda said.

“In our view, production curbs would drive a sharp drop in blast furnace utilisation rates, especially as EAF production would likely become instantly more competitive.

“This said, these policies would likely increase domestic steel prices and this could see steel exports reduce. This should help steel production outside of China and we could see a ROW restocking cycle take place, which may be conversely supportive in the immediate term.

“But in the end, this would only be transitory as the total amount of ore consumed should be set to fall materially.

“Outside of the fundamentals, we would expect CTA’s and other financial participants to take negative positions and this financial trading will likely continue to hold sway over prices.”

All the major iron ore players recorded small gains, with BHP (ASX:BHP) up 1.45% this morning, Fortescue (ASX:FMG) 1.24% higher and Rio Tinto (ASX:RIO) up 0.73%, while Champion Iron (ASX:CIA) bulked up by more than 2%.


Iron ore miners share prices today: