Iron Ore The World’s Most Volatile Commodity and Not About To Slow Down

Iron ore has been a clear leader from the early days of the raw materials rally. It is also the most volatile. Volatility is fed by the ongoing trade war between the world’s biggest producer of iron ore, Australia and one of the biggest users, China.

Iron ore has been a clear leader from the early days of the raw materials rally. It is also the most volatile. Volatility is fed by the ongoing trade war between the world’s biggest producer of iron ore, Australia and one of the biggest users, China.

Spot Iron ore prices Q1 2021

Then throw in volatility surrounding the Covid world economy and supply line shortages.

We have seen record prices this year and a series of wild swings,into a bear market and then returned to a bull market in about a month as China tried to bully Australia and talk down commodity prices.  Iron ore fuels China’s massive steel industry.

The gyrations in the past 30 days have seen iron ore ranked the most volatile of the two dozen most traded commodities around the world.

China is confused, one day it wants to cut steel production but control prices, then reduce investment but maintain employment.  The chaotic announcements are largelky the response of a bully not getting it’s way and not knowing how to deal with it.

Bottom line is China revived it’s economy after the pandemic by turning to fiscal stimulus and monetary easing by producing  enormous amounts of steel to feed it’s manufactured  property and infrastructure boom. This sent iron ore prices soaring, over double over the past year. How to contain the inflationary pressures? China now has tighter credit and a moderation in spending on construction. 

Beijing’s attempt to chart a course to the carbon neutral economy promised by President Xi Jinping last year is another spanner in the works, but clearly that was nothing but talk and misdirection.  Such a policy would involve producing a lot less of the alloy, which contributes 17 per cent of national carbon emissions, according to Goldman Sachs. Bets, recommended by Banks like Goldman have fueled many of the price swings on how these contrary polices could play out for the iron ore market, which typically moves in lockstep with steel and the Australian dollar.

The benchmark futures contract in Singapore topped out at a record $US233.75 a tonne on May 12. Two weeks later, it crashed to $US170.50, it should be said that is still more than double the average since trading began in 2013. 

Singapore Ironore 6 23 2021

China has started credit tightening and that signals that commodity prices should fall BUT at the same time, China’s steel mills continue to break records. Production hit an all-time high in May and has reached 473 million tonnes over the year to date. That’s well on its way to surpassing last year’s mark of 1.05 billion tonnes, which the authorities had vowed would be a high-water mark as China seeks to curb emissions from the highly pollutive sector.

Simply supply is struggling to catch up with demand.

Bloomberg reported that the structural problems that affect iron ore supplies in China remain prominent, said the head of a Shanghai-based investment firm affiliated to a steel mill in western China, who asked not to be named discussing his company’s positions in the market. He pointed to historically low inventories, insufficient shipments in recent weeks from major suppliers Australia and Brazil, and the possibility of curbs on domestic production after recent mining accidents

Beijing blames, at least publicly, speculators for driving prices higher. One irony of that policy is the important role speculators play in actually reducing volatility by boosting liquidity in futures markets, according to a recent note from Goldman. Put simply, more buyers and sellers mean that price adjustments become less abrupt

Steel demand may moderate as “China is stepping out of large-scale stimulus and seeking domestic consumption-led growth. China continues to seek alternatives to its heavy reliance on mostly foreign iron ore by encouraging imports of scrap steel imports. Much of this is part of a bullying attack on Australia. The reality is  none of these factors will necessarily mean a collapse in iron ore prices, as lower steel production should raise prices and improve margins at mills, making more-efficient, less-polluting grades of the mineral more affordable.

Then there is this factor, there is more than China in the world and  once iron ore prices settle, it’s likely they’ll be in a historically higher range given the weight of stimulus driving demand elsewhere in the world. When, or if economic indicators outside of China continue to improve steel production in the rest of the world will increase rapidly.

Earlier in the year BHP went online with South Flank, the biggest iron ore mine developed in Australia in over 50 years and comes at a time where Iron Ore prices are at a record high. A timely boost for not just BHP but for Australia. Australia’s most valuable export is iron ore and coming off the lockdown from COVID-19 is bringing in much needed revenue after massive budget drawdowns and increases in debt to avoid further economic and social disaster in the nation.

South Flank is expected to produce 80 million tonnes a year of iron ore BHP said the South Flank mine, alongside its “Mining Area C”, would form the largest operating iron ore hub in the world, producing 145 million tonnes per year. ‘

“South Flank’s ore will supply global steel markets for the next 25 years, helping to build electricity, transport and urban infrastructure across the globe,” BHP’s head of Australian mining Edgar Basto said.

BHP Iron Ore CorridorNAB vvvvvv

Mike Henry, BHP’s CEO told a Bank of America global metals conference earlier this week that the increasing iron ore supply coming from its South Flank project was “perfectly timed” as the iron ore prices hit record highs on multiple markets.

Iron Ore

BHP’s exports of iron ore, by far its most valuable commodity, hit a new half-year record last year and will exceed that this year given the production and price rise.  China’s demand for the steel-making ingredient soared and BHP’s Jimblebar mine in the Pilbara performed strongly.  Australia’s iron ore mega trio BHP, Rio Tinto and Fortescue share prices have recently hit all-time highs. Australia’s biggest export is iron ore and the price of iron ore has surged as record-breaking steel output in China, with it’s massive post-COVID stimulus programs and disruptions affecting rival suppliers in Brazil such as Vale. 

On April 21 BHP gave the following guidance:

  • Production guidance for the 2021 financial year remains unchanged for petroleum and iron ore.
  • Copper guidance has increased to between 1,535 kt and 1,660 kt and reflects stronger than expected performance at Escondida.
  • Metallurgical coal guidance has been reduced to between 39 and 41 Mt as a result of significant wet weather impacts during the December 2020 and March 2021 quarters.
  • Energy coal guidance has been reduced to between 18 and 20 Mt as a result of significant weather impacts at New South Wales Energy Coal (NSWEC) and lower than expected volumes at Cerrejón.

Since then the Iron ore price hit a record high of $US230 a tonnes as China’s steel mills run overtime.  China’s aggressive post-COVID-19 infrastructure-building programs fuel extraordinary demand for steel. Factor in the fact that global seaborne supply has been constrained due to ongoing disruptions affecting output volumes at Vale’s iron ore mines in Brazil.

The simmering trade war between Canberra and Beijing, some would politely call them China’s bullying tactics is ongoing and has led to the  “indefinite suspension” of the China-Australia Strategic Economic Dialogue. This is aa key diplomatic channel, have stoked concerns that China may seek to escalate efforts to loosen its reliance on Australian cargoes.  However when it comes to Australia’s stranglehold on ironore supplies this has not worked in China’s favor..

This past week iron ore prices have slightly pulled back like a number of commodity prices as specualtors took profits.  Prices are still above the $US200 a tonne mark.

Australia’s Federal Resources Minister Keith Pitt, who visited the Pilbara mining province earlier this week, described South Flank as an important project that would generate thousands of jobs in the region and demonstrated “why the resources sector is so important to our national economy”. “Establishing Australia’s biggest iron ore project in half a century is a significant vote of confidence in the industry’s future and its long-term benefits to Australia,” Mr Pitt said.


via BHP, Reuters, Bloomberg

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