Three key factors to watch for in iron ore after the Lunar New Year holiday
After the Chinese Lunar New Year holiday, the seaborne iron ore market will be affected by the macro-economic environment, seasonally low supplies and ongoing or additional steel production cuts in northern China, sources told Fastmarkets this week.
Positive monetary policy boost
Market sentiment has been particularly sensitive, in the short term, to official Chinese government economic or other related policies, a trader in northern China told Fastmarkets. And this is especially apparent in iron ore futures on the Dalian Commodity Exchange, as well as front-month swaps on the Singapore Exchange.
“This situation will continue into 2022 after Lunar New Year holiday on February 1-6,” he said.
Most market participant are bullish about downstream steel demand after the holiday because of China’s expansionary monetary policy and signals that infrastructure projects will actually take place.
On Tuesday January 18, China’s National Development & Reform Commission (NDRC) called for more investment in infrastructure development in the first quarter of 2022, with local government special bonds available for actual projects.
“The construction sector, including rebar consumption and housing construction starts, are key indicators for Chinese steel demand. Market sentiment is also bullish post-Lunar New Year because of [an expectation of] better weather conditions and a positive economic environment,” a mill source from south China said.
The People’s Bank of China (PBOC) cut the one-year Loan Prime Rate (LPR) by 10 points to 3.7% and cut the five-year LPR by 5 point to 4.65% on January 20.
Some market participants expect the rate cuts to boost China’s economic growth, especially in terms of infrastructure and the housing sector, because of the lower borrowing costs for companies.
Low Q1 supplies and speculation in low-alumina fines
Inclement weather conditions, including tropical cyclones in Australia and heavy rains in Brazil, tend to result in lower output from the major miners in those two countries in the first quarter every year, leading to annual supply concerns.
In Australia, Rio Tinto’s loading operations at the ports of Dampier and Walcott, as well as BHP’s operations at Port Hedland, typically experience tropical cyclones around January and February, leading to short-term supply concerns and speculative trading.
But this year, traders have have already picked up increased volumes of Australian fines such as Jimblebar fines (JMBF), Mining Area C fines (MACF) and Yandi fines (YF) from BHP to re-sell after the Lunar New Year, sources said, due to their low cost.
There were about 53 deals of JMBF, MACF and YF in total as of January 24 and seven deals involving Pilbara Blend Fines (PBF) over the same period.
A few trader sources said interest in PBF in the secondary market in January was weak because their equivalent prices at China’s ports were much cheaper, due to the sufficient supplies already being held at Chinese ports, with little or no reselling margins to be had.
Iron ore stocks at China’s ports were still above 150 million tonnes as of January 24, which is the highest level since October 2018, according to a local information provider.
In Brazil, meanwhile, iron ore producers, Vale, Companhia Siderúrgica Nacional and Mineração Usiminas, said on January 17 that they had restarted operations after a week-long halt caused by intense rainfall in the southeastern state of Minas Gerais.
Those week-long closures had sent iron ore prices soaring, especially for low-alumina products, due to speculative buying by Chinese traders, a Shanghai-based trader source said.
The same source was also bullish about Vale’s Brazilian Blended Fines (BRBF) and high-grade Iron Ore Carajas fines (IOCJ), due to the heavy rains in Brazil and the seasonally low output of domestically-produced low-alumina sintering concentrates in north China amid cold weather.
BHP’s YF, which typically fetch a premium compared to other low-grade fines, due to their lower alumina content, saw the most speculative buying interest in January because traders will be trying to resell them after the Chinese New Year holiday, a Xiamen-based trader source added.
Steel production cuts to continues to cap iron ore demand
Low seaborne supplies and related expectations may send iron ore prices soaring, but weaker demand from Chinese steelmakers could easily erase those gains, sources said.
Every year, demand for iron ore demand is typically affected by seasonal curbs to steelmaking production and periodic weather-related cuts in northern China. The additional caps on steel output in 2021 also affected the iron ore blending ratios in sintering and blast furnaces.
“There is no clear signs whether China will cap crude steel output again in 2022 as part of its decarbonization plans, but China has forbidden new steelmaking capacity and has continued with strict requirements for relocated steel projects,” a market analyst from Shanghai said.
Several market participants expect the government and steel association to issue specific guidance, or technical roadmaps, in 2022 to help steel mills work toward achieving their carbon peak and carbon neutrality goals.
The Winter Olympics on February 4-20 and the winter-heating season in north China from November 15-March 15 will also continue to weigh on iron ore demand in the first quarter of 2022.
On February 24, a Ministry of Ecology & Environment spokesperson said local governments will be authorized to restrict companies with high-emissions or to reduce logistics and trucking activities around Beijing during the Winter Olympics.
“This has provided policy support for local governments to [further] cut steelmaking production after the Chinese New Year, and there could be more cuts during the [Winter Olympics],” a market analyst based in Hebei said.
More than 60 cities in northern and eastern China were required to cut steelmaking production by at least 30% over January 1 to March 15, 2021, compared with the same period in 2020, to curb emissions during the traditional winter-heating season.
Meanwhile, Tangshan city has carried out two weather-related sintering production cuts as of January 24, 2022, compared with 15 cuts in total in the first quarter of 2021 in addition to its traditional heating-season output curbing policy, according to local government files. Those periodic production restrictions typically last about seven to 10 days and dampen iron ore demand in the short term.
Tangshan produced about 31 million tonnes of pig iron and 34 million tonnes of crude steel in the first quarter of 2021 according to the local bureau of statistics.
[Editor’s note: This article was updated to amend the 18th paragraph which erroneously stated that BHP’s Yandi Fines typically fetch a discount compared to other fines due to the former’s lower alumina content when initially published. This should have been a premium.]