Strong margins open the door for $US200 iron ore
William McInnesReporterApr 20, 2021 – 2.34pmStrong steel margins could pave the way for the price of iron ore to hit $US200 a tonne, commodity investors say, as Australian and Brazilian producers struggle to keep up with demand from China.
Iron ore prices shot to a nine-year high on Monday, rising 1.9 per cent to $US181.80 a tonne in the spot market, supported by strong margins at Chinese steel mills, according to Fastmarkets MB.
Tribeca’s Ben Cleary isn’t ruling out iron ore hitting $US200 a tonne. Peter Braig
“I would never put a cap on where prices can go,” said Tribeca Global Natural Resources portfolio manager Ben Cleary. “Customers’ margins are increasing, not decreasing, and so there’s definitely runway to go to $US200 [a tonne].”
Environmental restrictions introduced in China’s steel capital, Tangshan, are yet to show any sign of affecting steel production, with crude steel output jumping 19 per cent to a near record 94.02 million tonnes in March compared with a year prior.
AdvertisementThe strength of the margins means mills are still happy to keep buying up iron ore, even as the price of the bulk rises to its highest level since September 2011. Chinese domestic rebar is trading at $US781.38 a tonne.
“Margins are tracking at levels last seen in 2018,” said CBA mining and energy commodities analyst Vivek Dhar.
“The remarkable resiliency of China’s steel mill margins is noteworthy and indicates just how strong China’s steel demand is right now. Not only are margins absorbing high iron ore prices, but high coking coal prices, too, given China’s unofficial ban on Australian coking coal.”
Higher grade products are also more sought after, driving a strong premium for 65 per cent quality Brazil-origin fines, which hit a record $US216.30 a tonne on Monday.
“The thematic of China wanting to close down higher-emitting capacity and therefore seek higher grade ore into their existing capacity is absolutely going on, and Australia is really well placed, given it’s generally got higher grade iron ore,” said Mr Cleary.
Demand for steel is being driven by the increase in global growth and infrastructure spending.
“Growth data is strong the world over and that’s helping steel consumption and then the added demand coming from the fiscal stimulus on top of that,” said Mr Cleary. “It’s not just China where the demand pick up is coming from, it’s a global phenomenon.”
The strong demand for iron ore has ramped up pressure on producers in Australia and Brazil to keep supply steady, as miners in those countries battle tropical storms and COVID-19, respectively. “Any supply shortfall has got to help,” said Mr Cleary.
“The demand is increasing and there's an obvious supply response needed to meet that demand so you can only expect prices to remain supported. It’s a very bullish environment.”
On Tuesday, Rio Tinto reported it had shipped 77.79 million tonnes from Western Australia in the first three months of the year, in line with forecasts by Macquarie but below UBS’ forecast of 80 million tonnes.
It remains on track to achieve its shipping guidance of between 325 million and 340 million tonnes, however.
Vale missed expectations for its first quarter iron ore output, producing 68 million tonnes, against forecasts for 72 million tonnes, with Brazil still struggling to bring COVID-19 under control.
The company maintained its iron ore production guidance of 315 million to 335 million tonnes for 2021 despite the shortfall. The Brazilian miner has a history of missing its targets, however, and was forced to cut its production guidance for 2020 in early December.
While iron ore miners have reaped the benefits of surging iron ore prices for several months now, the latest surge in steel prices has been particularly good for domestic steel producers.
Scrap metal group Sims said on Monday there had been strong improvement in volumes and margins in the March quarter, sending its share price soaring more than 10 per cent to a three-year high.
BlueScope Steel is trading at its highest level since 2008.
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