(Repeats June 5 column with no changes. The opinions expressed here are those of the author, a columnist for Reuters)
By Andy Home
LONDON, June 5 (Reuters) - Markets do not move in straight lines.
It’s an age-old truism that the iron ore market would do well to remember.
The spot iron ore price as assessed by The Steel Index .IO62-CNI=SI fell relentlessly over the second half of 2014 and first quarter of 2015 to hit a low of $46.70 per tonne at the end of April.
It has since bounced back to a current $63.50, lifting some of the pervasive gloom that had enveloped the industry and causing at least some analysts to rein in their previous negativity towards the market.
There are sound reasons for the current correction but it is no more than that, a correction within the downtrend.
The iron ore market’s fundamental dynamics are going to remain challenging for the foreseeable future. Indeed, the current phase of higher prices is likely to do no more than prolong the pain of adjusting supply to demand.
The current upswing in the iron ore price is being driven by falling stocks.
Graphic on the iron ore price and Chinese port stocks:
Those at Chinese ports, the most visible part of the inventory picture, have fallen from a peak of 113.7 million tonnes in July 2014 to a current 85.4 million, according to consultancy Steelhome.
The speed of decline has accelerated over the last couple of months even as the price was plummeting.
That shouldn’t come as a surprise.
Falling prices in any commodity market can lead to destocking as players rush to liquidate higher priced inventory.
But the draws on port inventory also attest to temporary tightness in the iron ore market, a function of falling production among higher cost operators, not least in China, and seasonally robust demand.
The second quarter tends to be a strong one for steel production, both in China and elsewhere, and this year is no exception.
Run rates among China’s large steelmakers have picked up from an annualised 565 million tonnes in mid-March to 659 million tonnes in mid-May, according to The China Iron & Steel Association (CISA).
Right now, analysts at Macquarie Bank argue, the seaborne iron ore market is in deficit and has been for a couple of months. (“Commodities Comment”, June 3, 2015)
Total supply chain stocks in China, the bank estimates, have declined to around 40 days of consumption, which “compares favourably to the average of the last three years of 46 days, and is only two days above the lowest point in the series in June 2013.”
The inference is that the current destocking cycle might soon run its course to be followed by restocking.
That would absorb some of the extra supply that is heading China’s way from Australia and be price-supportive.
A very similar thing happened in the second half of 2013, the last time the iron ore stocks cycle turned. The rebuild of inventories helped the price recover from its swoon down to $110 and kept it propped up above the $130 level through the end of the year.
This combination of cyclical and seasonal drivers, however, shouldn’t mask the fact that the longer-term fundamentals in this market remain as challenging as ever.
Chinese steel production has been running softer this year and even after the sharp mid-May pick-up in operating rates collective production among the country’s largest mills is no more than flat relative to 2014.
And all that steel is still struggling to find a home.
It’s worth noting that while the iron ore price has staged a bounce-back from April’s lows, there has been no similar recovery in the Shanghai steel rebar price.
Graphic on iron ore and Shanghai steel rebar prices:
Rebar, the form of steel most associated with construction, an increasingly fragile pillar of the Chinese economy, has done no more than stabilise after sliding over the first quarter.
Not only does that say something about domestic demand but it promises margin pressure ahead for China’s steel producers.
The country, meanwhile, is exporting ever increasing tonnages as domestic oversupply seeps into the international market.
Net exports of steel products jumped from 48 million tonnes in 2013 to 79 million tonnes last year and the outbound flow is still gaining in momentum. Net overseas shipments were up another 42 percent in the first four months of 2015.
The protectionist reaction is building.
U.S. steelmakers have just filed a dumping complaint against China and other countries over corrosion-resistant steel , the latest in a growing list of steel trade cases.
China’s export safety valve, in other words, is coming under increasing pressure.
Stainless steel offers a warning of things to come. The European Union initiated tariffs on Chinese and Taiwanese stainless in March and the impact has already been manifest in slower Chinese production levels.
While Chinese steel demand stutters, supply of iron ore is only going to get stronger over the coming months.
A couple of the big producers have made token gestures to appease criticism they are flooding the market. BHP Billiton has pushed back a small de-bottlenecking project and Vale has trimmed some of its high-cost processing.
But in truth these are largely cosmetic changes. Neither they not the third of the “big three”, Rio Tinto, have shown any inclination to change course and stop pumping out iron ore into a weakening market.
Others such as Atlas Iron, are struggling on. The Australian producer is reopening mines after agreeing cost savings with its contractors.
It has reduced its break-even price to around $50 per tonne and, thanks to the iron ore price rebound, is now in positive margin territory again.
More hard-pressed producers, both in China and elsewhere, will grab the same life-line of higher iron ore prices.
But in doing so they will simply extend the low-cost-high-cost production displacement cycle, which means the ugly war of attrition will drag on even longer.
The short-term outlook for iron ore may have changed but it’s not a new dawn. The future forecast is for continued stormy weather. (Editing by David Evans)