Aussie bank ANZ says iron ore prices could “find a floor around current levels”, predicting a deficit will return to the Chinese market by the end of the year.

Iron ore prices have turned bearish in the past fortnight, sliding from US$135/t to around US$99/t this morning.

They hit a similar level in late September before a rebound around China’s National Day festivities in October, when restocking typically occurs.

ANZ senior commodity strategist Daniel Hynes said the year on year reduction in steel production in China could be smaller than in recent months.

Crude steel production fell 20.3% in September to its most sickly level in more than 2.5 years, with early indicators showing that may have extended in October.

Hynes said steel production growth in ex-China markets like Japan and India would also have an indirect impact on prices.

According to Hynes, steel production cuts may be less extreme in November and December with the Communist Party’s target of limiting steel output to 2020 levels (1.065Bt) already in reach.

“Iron ore exporters have struggled for consistency in a year of weather disruptions and COVID-19 restrictions,” he said.

“While this has eased the impact of low Chinese demand, September still recorded an iron ore surplus of 45m tonnes. CISA steel data suggests the surplus could be as high as 50m tonnes in October.”

“Assuming the low point in China’s steel output growth has passed, the surplus of iron ore could quickly evaporate.”

“We calculate that China’s iron ore market balance could record only a minor surplus of 9m tonnes in November, before moving back into a deficit of approximately 40m tonnes in December, assuming iron ore exports pick up into year end.”

Hynes said the Winter Olympics in February remain a big milestone for what’s next in the iron ore and steel market.

“This would flick China’s iron ore market balance from surplus to deficit in December, particularly if supply issues in Australia and Brazil continue,” he said.

“We expect iron ore prices to find a floor around current levels. But, constraints on China’s steel output are likely to remain until after the Beijing Winter Olympics, so the upside looks limited in the short term.”

ABS figures this week showed lower iron ore prices in September caused a big reduction in Australia’s trade balance, falling $2.5 billion to a surplus of $12.2b.

Steel demand on the slide

A bigger concern for long-term iron ore prices is a potential reduction in steel demand, impacted by Covid lockdowns and issues in the Chinese real estate market.

Margins for steelmakers have contracted in recent days, on the back of both falling prices and exorbitant coking coal prices.

“Previously, high steel prices (and steel mill margins) accompanied the rapid fall in iron ore prices,” Commbank’s Vivek Dhar said.

“That indicated that the initial steel output cuts in China that began in July were much steeper than any fall in steel demand. The recent fall in steel prices means that narrative has now flipped.”

“Steel demand is now contracting faster than steel production. That means that iron ore prices are far more likely to stay at these levels and are less dependent on China’s policy to restrict steel output.”

ANZ’s Hynes said steel futures would be impacted by the Chinese property market.

“Sentiment in futures, however, will be dictated by developments in the China’s real estate market,” he said.

“The likelihood of seeing a recovery in steel production before the end of the Chinese New Year looks low. Therefore, any potential upside will be reliant on markets outside of China.”

How are the miners looking today?

Pretty healthy.

The big iron ore miners are trading at slight gains, but the real catalyst for a 1% rise in the Materials index has come from the big gold miners.

Spot and Comex futures lifted 1.6% and 1.7% respectively overnight to ~US$1793/oz, or $2425/oz Australian.

Northern Star (ASX:NST) was up 4.1%, Evolution Mining (ASX:EVN) rose 3.1%, Newcrest (ASX:NCM) gained 3.02% and in the mid-tier Silver Lake (ASX:SLR), Regis (ASX:RRL) and West African Resources (ASX:WAF) were all up 3% or more.

Gold’s charge came as the Federal Reserve and Bank of England gave indications interest rate rises were not due anytime soon.

Higher interest rates are considered bad for gold, an investment which unlike cash does not accrue interest.

Gold miners share prices today:


Perenti deadbats merger speculation

Perenti Global (ASX:PRN) has played a classic dead bat to speculation it is looking to merge with Macmahon (ASX:MAH) or Imdex (ASX:IMD) in a bid for growth.

Like Faf du Plessis surviving a final innings siege, Perenti responded with this ambiguous nugget: “Perenti can confirm it has not been a party to any recent merger or acquisition activity.”

The mining services firm formed from the merger of Kalgoorlie-born Ausdrill and Barminco – effectively two halves of the intertwined fortunes of childhood friends and multi-millionaires Ron Sayers and Peter Bartlett.

Neither are involved in Perenti anymore, which conducts most of its business in Africa and WA.

Perenti booked $2.02 billion of revenue in the 2021 financial year and underlying EBIT(A) of $170.8 million, with $567.9m in liquidity and $503.3m of net debt.

The mining services sector has seen a period of accelerating consolidation, most recently with the merger of WA drillers Swick (ASX:SWK) and DDH1 Drilling (ASX:DDH).

Perenti Global share prices today: