Weak demand for iron ore has been the primary driver of slumping seaborne cargo prices. This is largely due to ongoing steel-output curbs in several provinces in China, an impact that is likely to intensify with the latest release of the country’s “Two-High” energy and emissions policy.
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Bearish demand outlook up to first quarter of 2022
The iron ore market has already been stricken by weak demand since July after market chatter emerged about the Chinese government’s intervention to keep this year’s steel output from exceeding last year’s.
Several provincial governments in China have since gone ahead with the curb on steel outputs for the rest of 2021 or have taken measures to keep output levels consistent with those of the previous year, despite no official policies having yet been announced.
For instance, the Guangxi provincial government held a meeting at the end of August with its steelmakers to discuss plans about steel output reductions, which will most likely prompt September’s crude steel output from the province to be approximately 30% lower than the average monthly output of the first half of the year, sources said.
The provincial government in Yunnan province also imposed restrictions on industrial operations, with steel mills strongly encouraged to shift at least 30% of their September production to November and December.
“With more provinces emerging with news on steel-output curbs, sentiment for the iron ore market will most likely remain depressed because of the weakness in demand,” a Singapore-based trader said.
China’s new “Two-High” energy and emissions policy, meanwhile, is likely to last up to the first quarter of 2022, further depressing the already weakened demand outlook in the iron ore market, sources said.
A draft of the policy plan was released by the Ministry of Ecology and Environment on September 18. It showed the ministry increasing the initial affected 26 cities to approximately 64 cities.
Seasonal factors may also weaken demand.
“With the winter season approaching in the [upcoming] fourth quarter of the year, sintering restrictions will typically be stricter,” an analyst in Shanghai said, “and with the Winter Olympics coming up in February next year, it is almost certain that iron-ore demand will most likely be deemed weak.”
The month-to-date average for Fastmarkets’ index for iron ore 62% Fe fines, cfr Qingdao in September was $120.95 per tonne at the time of writing, down by $38.71 per tonne (24.2%) from August’s average.
The month-to-date average for Fastmarkets’ index for iron ore 65% Fe Brazil-origin fines, cfr Qingdao in September was $143.48 per tonne at the time of writing, down by $41.02 per tonne (22.2%) from August’s average.
“In July, I would think that the 62% Fe fines iron ore prices would likely hold out at around $90-100 per tonne [cfr China] by end of the year,” the analyst in Shanghai said. “But with all the bearish news in the market now, I think prices easing to around $80-90 per tonne [cfr China] might not be impossible.”
Miners further deepen discounts on long-term cargoes
Another clear sign that the demand for iron ore will weaken was from the monthly discount levels issued by miners on their products, sources told Fastmarkets.
For instance, BHP reportedly set October discounts for Jimblebar fines (24%), Yandi fines (30%) and Mining Area C fines (17.5%). The levels were much deeper than September's respective discounts of 9.75%, 15% and 7%, several market sources said.
“Fortescue Metals Group [FMG] has yet to set its monthly discounts for their products for October,” a Hong Kong-based trader said, “but levels should be deeper compared with September’s, following the trend set by BHP.”
The same trader added that the September discounts for FMG’s Super Special fines (SSF) and Fortescue Blended fines (FBF) were at 30% and 26% respectively, higher than August’s 27% and 19%.
“It will not be surprising to see SSF and FBF discounts in the range of 30 to 40% for October, since the demand for iron ore is anticipated to be weak,” the Hong Kong-based trader said.
In the Chinese secondary market, steel mills were heard offering their Pilbara Blend fines (PBF) long-term cargoes because, prompted by the steel-production curbs, they wanted to keep inventory levels low, several traders said.
Some of these offers were reportedly made at discounts of between $1 and $2 per tonne on top of the October average of a 62% Fe index, compared with offers made on the primary market where the premiums were at around $1-2 per tonne on top of the October average of a 62% Fe index, traders said.
“Steel mills were trying to offload extra stock of PBF to the market because most of them do not think that they will be consuming much of the popular mid-grade iron ore fine,” a mill source in Northern China said, adding that “most of the mills are likely to adopt a more cost-efficient approach.”
High prices for coking coal have been the main driver for mills to switch their focus toward being more cost-efficient. That has prompted several steelmakers to increase their intake of low-grade iron ore fines instead, the same mill source said.
“High-grade iron ore demand has definitely been weaker because mills were trying to balance their costs and lower steel production, so the switch toward low-grade [iron ore] fines has definitely dented the demand in the high-grade segment,” the same mill source added.
A second mill source in Northern China said that most mills will probably continue to adopt the cost-efficiency approach if steel production continues to be curbed. This will most likely last at least until after the Winter Olympics, the mill source added, saying a price rebound for iron ore is therefore unlikely to happen anytime soon.
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Market participants are anticipating a very bearish demand outlook for the iron ore market and are doubtful of any form of price rebound until at least the first quarter of 2022.