LAUNCESTON, Australia (Reuters) - The iron ore market is looking increasingly bifurcated between a robust China and a lacklustre rest of the world, and the challenge is working out whether the boost from the one is enough to outweigh the drag from the other.
Certainly the market pricing indicates that the China story is the more compelling, with spot prices for 62% iron ore for delivery to north China, as assessed by commodity price reporting agency Argus, trading near the highest in a year.
The price ended at $110.50 a tonne on Tuesday, up from $108.95 the previous day and close to the 11-month high of $112.40 reached on July 14.
Iron ore is up 39% since the low so far this year of $79.60 a tonne, hit on March 23 as both China and the world was enduring economic and social lockdowns to combat the spread of the novel coronavirus pandemic.
The rally in iron ore prices has been explained by market commentators as having two legs, namely strong China demand and concerns over supply, especially from number two exporter Brazil, which is one of the country’s worst hit by the coronavirus.
Certainly Chinese demand has been robust, and given the world’s biggest steel producer accounts for about two-thirds of seaborne iron ore, the rally in prices is understandable.
China imported 101.68 million tonnes of iron ore in June, a 33-month high, taking imports for the first half of 2020 to 546.91 million tonnes, up 9.6% over the same period in 2019.
But is China’s appetite for iron ore enough to offset weakness in the rest of the world?
Other Asian importers have seen their purchases of iron ore slide in recent months as the coronavirus takes its toll on steel-intensive industries such as ship and vehicle manufacturing.
Japan imported 5.08 million tonnes of iron ore in June, down 37.3% from the same month in 2019, according to vessel-tracking and port data compiled by Refinitiv.
Japan’s second-quarter imports were 20.16 million tonnes, down from 24.92 million in the same period last year.
South Korea imported 5.32 million tonnes in June, down from 7.03 million in the same month last year, while second-quarter imports were 17.2 million tonnes, a drop of 10.2% from the corresponding period in 2019.
The story is more dire in Europe, with June seaborne imports pegged by Refinitiv at 5.09 million tonnes, down 55.7% from the same month last year, while second-quarter imports of 18.98 million tonnes are 42% lower than for the same period in 2019.
Putting China’s strength and the rest of the world’s weakness together shows they largely cancel each other out.
World imports of iron ore in June were 118.69 million tonnes, little changed from the 118.55 million from the same month last year.
Second-quarter imports were up to 359.37 million tonnes from 2019’s 347.92 million, but first-half imports were a tad weaker at 717.09 million from last year’s 721.26 million.
Overall, it’s fair to say that global seaborne iron ore volumes are largely flat, and therefore shouldn’t be much of an influence on the price trend.
The fears about supply disruptions are so far just that, fears.
Brazil’s Vale, the country’s largest exporter of iron ore, said output rose in the second quarter to 67.6 million tonnes, up 5.5% from a year earlier and 13.4% above the level in the first quarter.
Australia’s two biggest producers, Rio Tinto and BHP Group, also reported higher output in the quarter ended June 30, with Rio posting a 1.5% rise from the year-earlier period and BHP logging a 7% increase in production.
Overall, the picture that emerges is of an iron ore market where supply is adequate and consistent, while the demand strength in China is being offset by weakness elsewhere.
In these circumstances it could be argued that the spot price looks somewhat expensive, but not ridiculously so.
— The opinions expressed here are those of the author, a columnist for Reuters —
Editing by Christian Schmollinger