- What drove the rally in iron ore prices during H1 2019?
- Have the 3 iron ore majors lost control over its prices in 2019?
The iron ore industry is, generally, characterized by voluntary oversupply created by the top 3 players – Vale, BHP and Rio Tinto, which in turn drive the global iron ore prices. These iron ore majors have always kept the production and supply higher than the demand and hence, kept the prices under pressure. However, the year 2019 so far has portrayed a different story for the steel making raw material – iron ore. Its prices shot up starting January this year reaching the 5-year high of $120/tonne in July, however, witnessed freefall starting August 2019 and reached its 5-month low of $86/tonne.
The rally in the first half of the year was driven by supply crunch and simultaneous demand upsurge. The supply crunch was created primarily by the world’s largest iron ore producer – Vale and the demand surge was driven by the world’s largest consumer – China. While Vale’s iron ore production declined by 23% in H1 2019 vis-à-vis H1 2018, China’s steel production surged by 10% during the same period.
On January 25, 2019, Vale reported the collapse of its tailings dam in Brumadinho (Brazil), which flooded the nearby regions with 13 million cubic meters of mining waste and killed almost 300 people. As a result, Vale had to halt 40 million tonnes of production at its Brucutu mine, withdrawing ~10% of its annual output from the market. Vale’s production declined from 101 million tonnes in Q4 2018 to 73 million tonnes in Q1 2019. The fear of supply shortage shot the iron ore prices up by ~12% by the end of January 2019.
The rally continued in February as well and the spot price increased by another 3% closing the month at $81.6/tonne. To add to the situation, Pilbara region of Australia was hit by the Cyclone Veronica in late March resulting in production halt at major iron ore mines. There are approximately three major iron ore export ports on that coast where operations were suspended on the coast as well as road/rail networks served by these ports. Australia’s seaborne iron ore exports declined sharply by 14% in March 2019. Rio Tinto’s iron ore production and shipment in Q1 2019 fell by 9% and 14% respectively as compared to Q4 2019. BHP also reported 3% decline in its production in March 2019 quarter compared to March 2018 quarter. Owing to this disruption, Australian majors BHP and Rio Tinto forecasted decline in production of 7 million tonnes and 14 million tonnes, respectively.
On the other hand, the demand pull also played its role creating the overall supply deficit in the industry. China’s demand for iron ore reached new high, reflected by 11% surge in its steel production in H1 2019, driven by the country’s recent stimulus package to promote growth in infrastructure and property sector. The deficit created by above demand supply pull in H1 2019, forced China to consume its stockpiles. The inventory levels at 45 major Chinese ports were 142.88 million tonnes in January 2019, which fell to as low as 114.14 million tonnes in early July. Falling stockpiles at these Chinese ports further fuelled the rally and price reached $117/tonne by end of July 2019.
However, starting August 2019, the tables have turned. The global iron ore spot price fell by ~26% reaching its 5-month low of $86/tonne, again driven by (changing) demand supply dynamics. Iron ore shipment by top miners seem to have stabilized with the overall output increasing by 1.3% y-o-y totalling 308.9 million tonnes (contributed by Vale, Rio Tinto, BHP and Fortescue Metals Group). Demand, on the other hand, has slowed down due to seasonal affect (onset of winter season) and production cuts in some steelmaking hubs to reduce pollution. The continued escalation of US China trade war is also adding to the situation by reducing Chinese steelmaker’s appetite to produce. Further, weakening yuan is also hurting the purchasing power of mills, thereby, flaring up the demand slowdown. Inventory levels at Chinese ports have started to surge as well. The above combination of slowing demand and improving supply has pressurized price, which fell from $117/tonne (July end) to $92/tonne (September end), ~21% decline.
For the rest of 2019, prices are expected to be driven largely by sentiments around demand which in turn will be driven by overall economic growth and US China trade situation. During Q4 2019, prices are expected to hover around $75-95/tonne, unless the trade war worsens during this period. From FY2020, the revival of Brazilian mines and Australian ports is expected to improve the overall iron ore supply in the market. The demand side, however, depends largely on global economic growth and the tension level between U.S and China. In its latest release, IMF forecasts slowdown as it expects the global economy to degrow from 3.1% in FY 2018 to 2.6% in FY2019 and marginally grow to 2.8% in FY 2020. The US-China trade situation is also uncertain as the two countries still seem adamant on their stance. Hence, both these factors are expected to keep the overall demand for iron ore subdued over the next 2-3 quarters. With subtle demand and slight improvement in supply, the global iron ore prices are forecasted to remain volatile but won’t touch the peaks of early 2019. However, the only upside to this is closure of U.S-China trade war and introduction of aggressive stimulus by Chinese government to promote infrastructure in early 2020.