- Prolonged flooding in China could limit the use of construction steel and drag down demand for steel rebar in the short term, which in turn could damp the demand for iron ore. So far, it has been reported that steel mills in the affected regions have continued to operate as normal. The floods have, however, caused a few days of delay in the arrival of steelmaking raw materials. If the heavy rains continue, the effect may be more significant on demand, because it will impede construction work. But once activity recovers after the wet season is over, we expect there will be a pick-up in demand for construction steel and, consequently, for iron ore.
- Another sign of potentially weaker demand amid the rainfall can be seen in the freight market. The recent upward trajectory in freight rates stumbled in the week ended July 10, with significant declines on China-bound iron ore routes. Freight rates from Dampier and Saldahna into Qingdao fell respectively to $8.95 per tonne and $15.00 per tonne, down by 17% and 6% week on week. Declines were also seen in the Atlantic basin on the Tubarão-Qingdao route, with the freight rate slipping by 8% to $19.10 per tonne. This may also indicate a certain level of supply saturation. At the same time, heavy rains have the potential to increase the moisture content in iron ore stockpiles, which can cause issues during the sintering process. In turn, this may encourage some mills to use ferrous scrap as a feedstock in the near term.
- In general, there has been some improvement in Chinese steel market sentiment recently, with positive expectations about the economy for the second half of 2020, especially with announced infrastructure spending boost from the government. While we expect that firm demand will maintain iron ore prices at elevated levels, we also expect that increasing seaborne iron ore supplies from both Brazil and Australia will put a lid on further price rises. Moreover, there is little room for more increases because Chinese blast furnace utilization rates have stagnated at record-high levels above 94%, and mills are drawing less from port stocks.
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