Ground Breakers: China vows to control iron ore (again) after prices threaten US$150 per tonne

Not to invoke The Smiths lightly, but stop me if you think that you’ve heard this one before.

China thinks iron ore prices are too high and it’s taking aim at speculators after the Platts 62% price hit a five month high of US$147/t on Friday.

That’s 70% of lows of US$87/t in late 2021 and a ripper margin for Australian iron ore producers.

That came off the back of both Chinese demand signals as China cut interest rates to stimulate investment in its ailing property sector and infrastructure, collectively the source of more than half its domestic steel demand as well as Australian supply fears.

Those fears will only be heightened after the first case of Covid-19 on a WA mine site was reported on Sunday at BHP’s (ASX:BHP) Yandi iron ore mine, part of its Mining Area C hub near Port Hedland, forcing around 80 staff to isolate.

The price surge has led China’s economic watchdog the National Reform Development Commission to crackdown on “price gouging and malicious speculation” to “ensure price stability” in an official statement on Friday.

That eventually worked last year after China forced its steel mill output to tumble through the second half of 2021, sending prices as low as US$87/t in November after they hit a record US$237/t in May last year.

China has long talked up its plans to diversify away from Australian iron ore and jawbone prices amid diplomatic tensions with Australia which have seen it cancel imports of coal, wine and lobster from Australia.

China’s state media organisation the Global Times blamed hoarding ahead of the Lunar New Year holiday (where many industries shut down as workers return to their home provinces) for driving the spike in prices, which has come as a surprise with steel production still subdued during the March quarter ahead of the Beijing Winter Olympics.

Commbank analyst Vivek Dhar said iron ore prices remain supported by strong steel margins, which have come about as China has managed to keep soaring domestic coking coal prices under control.

“We think there’s some truth that speculation, particularly around this time of year, may be the primary driver of iron ore prices,” he said.

“However, there are other factors to consider. The most important in our view is steel mill margins, which have largely tracked between $US90‑120 per tonne of steel rebar of hot rolled coil produced this year.”

“Steel mill profitability is a significant driver of iron ore prices and would need to be lower to meaningfully pressure iron ore prices lower,” Dhar said.

“For instance, the fall in iron ore prices to $US87/t in November last year was preceded by steel mill margins turning negative for a week. Policy has been another key driver of iron ore prices.”

Dhar said China’s lending rate cuts, which come as the US fed looks to increase interest rates to counter rising inflation, could also drive demand growth.

“Infrastructure investment will likely follow, helping steel demand hopes in coming months,” he said.

“Lower interest rates is also likely to stabilise the downturn in the property construction sector. Both these sectors account for ~30% of China’s steel demand.”

WA miners were largely down off the back of the Covid news over the weekend, led by BHP and Rio Tinto (ASX:RIO).

Iron ore majors share price today:

Gold Road caught short at Gruyere

Gold Road Resources (ASX:GOR) has pledged its Gruyere gold mine will improve in 2022 after falling short on its production and cost guidance in 2021.

The relatively young gold mine, half-owned and run by South African giant Gold Fields, delivered 246,529oz last year, 1% below its guidance of 250,000-260,000oz.

Gold Road’s 123,265oz share was delivered at $1558/oz, up on its expected all in sustaining cost range of $1450-1525/oz.

GOR is the latest ASX-listed gold miner to struggle with guidance in a sector facing inflationary and labour pressures.

Gruyere delivered 67,813oz in the December quarter at AISC of $1526/oz, up on a disappointing December quarter with higher plant availability and head grades, but down on expectations due to delays accessing high grade ore in the stage 2 pit “partly attributable to labour force delays and inclement weather”.

Gold Road expects Gruyere to deliver 300,000-340,000oz at $1270-1470/oz, but warned its guidance is subject to the pandemic and the reopening of State borders.

Meanwhile, the company plans to spend $30 million on exploration looking for a repeat of Gruyere on its 100% owned ground around the Yamarna belt after increasing its solely owned resource outside the Gruyere JV by 70% to 510,000oz.

It will turn the rigs for around 160,000m looking for a new discovery to feed into Gruyere or form a second, standalone project in the Yamarna Belt in WA’s Goldfields region, where the Gruyere find was made back in 2013.