Bulk Buys: Iron ore price bounces back to end wild May on a high
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• Benchmark 62% Fe iron ore price closes a wild month after 5.6% rally to $US198.75
• Iron ore futures trend higher at the end of a week dominated by talk about Chinese intervention
• Coking coal finds price support as Aussie export prices edge higher along with Atlantic premiums
If you need to know how important the present iron ore boom has been to Australia in these trying pandemic times look no further than the WA Government’s $2.36 billion operating surplus.
Then there is Australia’s eighth consecutive current account surplus, an $18.3 billion credit powered by a record $48 billion worth of exports from the metals and mining sector.
No surprises then that the McGowan Government is bumping up port fees by 25 per cent so BHP, Rio, FMG et al cover the odd $195 million it wants to spend around the world’s largest bulk export facility at Port Hedland over the next four years.
Not that iron ore majors had much cause for complaint, as a price rally went some way to helping them cover that cost virtually overnight.
Platts 62% Fe iron ore price nearly touched the magical $US200/t mark, up yesterday 5.6% to $US198.75 to close out a volatile month in positive territory.
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In case you’ve been living under a rock, you’d remember prices headed into inconceivable territory in mid-May, hitting ethereal highs of $US233/t before Chinese government crackdowns on speculation brought them back (closer) to Earth.
But Chinese steel demand and iron ore futures have already shown signs of recovery amid solid manufacturing indicators.
So much for speculators …
Good thing speculation has been eradicated from Chinese commodity futures…
Dalian iron ore now up ~20% from the lows of last week. Makes you wonder who's in the background pulling the strings? pic.twitter.com/edXOXpPyZ7
— David Scutt (@Scutty) June 1, 2021
“Signs of stronger demand continue to push iron ore futures higher,” ANZ analysts wrote in a note yesterday.
“Sentiment received a boost after China’s steel purchasing managers’ index in May improved to 46.1, after falling the two previous months.
“A strong rise in the output component of the index was even more promising for demand. This follows China’s overall manufacturing PMI holding steady at 51.1 in May.
“The steel making raw material managed to end May higher, despite a vicious selloff mid-month after Beijing tried to jawbone the market lower.
“However, the efforts appear to have failed, with efforts to curb emissions from the steel industry subsequently supporting steel prices and dragging iron ore higher.”
In a research note yesterday CBA mining and energy commodity strategist Vivek Dhar noted large steel margins that incentivised high iron ore prices had contracted since the crackdown.
“The rapid fall in steel mill margins in China shows just how quickly market conditions have changed for iron ore.
“China’s steel mill margins have declined ~80% since peaking on May 12 and are now back at levels last seen in late March.
“Lower steel mill margins in China usually leads to lower iron ore prices and vice versa.”
Rebar was fetching US$812.70/t overnight Monday, up 2.9% on Friday but down on prices of close to $S$950/t earlier in the month.
Fears about a sustained downward shift in prices have been stoked by analysts mooting the prospect that iron ore from outside Australia could supplant our exports as trade relations continue to strain.
But with Australia’s immense infrastructure advantages, supply side growth could be coming from our own shores.
Reports yesterday afternoon indicated Chris Ellison’s Mineral Resources (ASX: MIN), owner of the Koolyanobbing, Wonmunna and Iron Valley mines in WA, had bought Aurizon (ASX: AZJ) out of a $10 million, 7.5 per cent stake in the Australian Premium Iron joint venture.
A partnership between China’s Baowu, Aurizon (via their takeover of Aquila Resources), Korea’s POSCO and America’s AMCI, the 40mtpa West Pilbara operation was considered unviable during the downturn on account of its reported US$7.4 billion price tag.
It has been suggested that a scaled down version, potentially leveraging MinRes’ existing infrastructure and operating experience, could help bring it to market.
It comes after Fortescue Metals Group (ASX: FMG) announced its intentions to push ahead with its 22mtpa Iron Bridge magnetite development despite a US$900 million cost blowout.
Speaking to Stockhead last week iron ore market expert and Magnetite Mines director Mark Eames said it would be difficult for new producers to bring on enough supply to collapse prices given the global appetite for infrastructure investment and growth.
“All the indications are that steel demand is firing up around the world,” he said.
“China’s not only got its own stimulus package where it’s been investing in infrastructure, but it’s also been driving the Belt and Road program, which is about regional infrastructure links.
“Infrastructure is what consumes steel – it’s railways, bridges, buildings, heavy engineering structures, cars, white goods – those are the things that are really driving demand.
“What you’d look for it some significant shift in the way the Chinese economy is operating that they could do without all those new buildings. At this stage it’s not obvious, to me anyway, that that’s happening.”
Coking coal was the month’s biggest price mover among the bulk commodities.
China’s unofficial ban and push to replace Aussie imports with more expensive sources from the US and Canada has provided price support for Australian premium coking coal heading to other markets, Dhar said in his note.
“Coking coal prices surged through the back half of April as demand outside China picked up,” he wrote.
“Australian coking coal prices have found support from higher Atlantic basin coking coal prices as buyers outside China look to source the cheapest coking coal.
“Demand for Atlantic basin (US and Canadian) coking coal has broadly increased over the last six months due to stronger demand from China.”
Dhar noted domestic coking coal prices in China still rose despite the mid-May crunch on steel margins, which is likely to provide support for Atlantic Basin prices and demand.
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At Stockhead, we tell it like it is. While Magnetite Mines is a Stockhead advertiser, it did not sponsor this article.