https://www.forbes.com/sites/timtre...m-a-shift-away-from-scrap-steel/#6ae693d2606aIron Ore Miners Are Surprise Winners From A Shift Away From Scrap SteelTim TreadgoldContributor
“Less is more” is a term usually associated with architecture but it where it might just as easily be applied is to iron ore where Chinese buying habits have resulted in a higher price for the steel-making ingredient at a time when trade troubles might have been expected to have cut the price.
The net result of steel mills buying more iron ore is lift in the benchmark price of the most commonly traded form of the ore, material grading 62% iron, to a 10-month high of $74.48 a ton, up the best part of $10/t over the past month and back to roughly where is was before the China v U.S. trade war started.
The effect of the iron ore price rise can be seen in the higher share prices of the major producers of seaborne ore, including the world’s biggest mining companies, BHP, Rio Tinto and Anglo American.
BHP shares have risen by 7% on the London and Australian stock exchanges since early last month. Rio Tinto is up 10.7% and Anglo American has risen by 16%.
But the best example of what’s happening in the revival of the iron ore market is the pure-play Australian producer of the material, Fortescue Metals Group, which has risen by 34% over the past three months, partly as a result of the higher benchmark iron ore price but more because its production is dominated by lower grade ore which trades as material assaying 58% iron.
Less Scrap, More Ore
It’s in the low grade ore that the “less is more” situation can be seen most closely because Chinese steel mills had, until about six months ago, been demanding high-grade ore, hitting low-grade material with a hefty discount.
Tougher business conditions in China, caused in part by the trade war, have triggered a change in the way steel mills operate in two important features.
The first change is that low-grade ore is once again in demand because it is cheaper, selling for about $54/t, a price which is 35% higher than the $40/t as recently as November.
The second change is that Chinese steel mills have cut their use of scrap steel in their production process because it is the most expensive form if raw material.
Morgan Stanley, an investment bank, estimates that scrap used in the first phase of steel making has dropped from a 24% market share to 15% with the difference being made up using more iron ore.
The switch from using less scrap and more ore (less-is-more) could last for some time, according to Morgan Stanley.
“Lower scrap use could persist, lifting iron ore demand,” the bank said in a note headed “less scrap, more ore”.
Morgan Stanley’s calculations show that the shift away from high-priced scrap could boost overall iron ore demand in China, which has the world’s biggest industry, by around 40 million tons a year.
Iron Ore Surplus Fades
The importance of the 40m/t estimate is that it neatly cancels out a 37m/t surplus of iron ore which Morgan Stanley had been expecting for 2019, flipping a market from a surplus to near balance.
“So, despite low steel (profit) margins and falling production, we could see higher than expected iron ore prices this year,” the bank said.
In time, the situation will reverse as China’s production of scrap, and its collection systems mature, but the shift could take some time which means that the iron ore could remain surprisingly elevated.
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