LAUNCESTON, Australia (Reuters) - Iron ore’s ongoing run above $100 a tonne is begging the question as to how long a price rally can sustain on fear of an event that is yet to present itself in the evidence.
The surge to a 10-month high on June 8 of $105.75 a tonne in spot iron ore for delivery to China, as assessed to by commodity price reporting agency Argus, was largely built on market concerns that shipments from number two exporter Brazil would be hit by coronavirus shutdowns at mines.
The price has eased slightly since the high to end at $103.85 a tonne on Wednesday, but it has been above the $100 level on seven of the last nine trading days.
The spot price is also up 30% since the low so far in 2020 on March 23, but to be fair part of this rally has been the resumption of economic activity in top importer China after the lifting of the restrictions aimed at curbing the spread of the novel coronavirus.
While Chinese demand is anchoring the iron ore market, the froth in the price is driven by fear that Brazil’s exports are likely to drop.
The order by a Brazilian court that the country’s top miner Vale close mines at its Itabira complex in Minas Gerais state after 188 workers tested positive for the coronavirus certainly added some fundamental justification to the market fears.
However, these concerns were tempered by Vale reaffirming its output guidance despite the potential loss of 10% of its iron ore output.
It’s possible that Vale can still keep exports at normal levels by using stockpiles, but this assumes the halt to operations is relatively short.
In the meantime, vessel-tracking and port data compiled by Refinitiv suggests Brazil’s exports are holding up.
A total of 145 vessels carrying 23.4 million tonnes of iron ore are expected to leave Brazil in June, the data showed.
It’s likely that this figure will be revised upwards as more cargoes are arranged, but even if it isn’t, June’s total wouldn’t be far short of the 24.87 million tonnes shipped in May, and would be slightly higher than April’s 23.24 million.
It’s also worth noting that shipments from Australia, the world’s largest iron ore exporter with almost 70% of China’s market, have been strong as well.
June exports assessed so far are at 48.7 million tonnes, but this figure will be revised higher as more cargoes are arranged.
Australia’s exports in May were 77.2 million tonnes, 75.6 million in April and 77.3 million in March, according to Refinitiv.
Comparing to the year-earlier months, only May was slightly below the same month in 2019, but a miniscule 800,000 tonnes, while April and March were both higher.
While Australia and Brazil dominate global seaborne supply, it’s worth noting that exports from number three South Africa also appear to be recovering as the country gradually lifts its economic restrictions.
June loadings so far are around 6.8 million tonnes, up sharply from 4.2 million in May and 3.7 million in April, according to Refinitiv.
It is reasonable for the iron ore market to build in a premium for the fear of the loss of some Brazilian supply, but ultimately this fear will have to be realised in order to justify the higher price.
Working out how much of a premium is baked into current prices is at best an inexact science, but the forward curve for Singapore Exchange iron ore does provide some clues.
The front month contract was at a 12.9% premium to the six-month in early trade on Thursday, wider than the 9.7% premium that prevailed a month ago and the 4.5% at the end of last year.
Watching whether the iron ore curve’s backwardation increases or flattens may provide insight as to whether the market views the threat of supply disruptions as getting worse, or easing.
The opinions expressed here are those of the author, a columnist for Reuters.
By Clyde Russell; Editing by Christopher Cushing