LONDON A disconnect
between Chinese iron ore and steel tags that began in late 2012
raises questions on whether there is enough demand to maintain
iron ore buying interest and prices.
"Steel is an oversupplied
market; iron ore is undersupplied. The fundamentals are
slightly different at the moment," Melinda Moore, head of iron
ore at Standard Bank Plc, London, told AMM sister
publication Steel First.
Low stocks at Chinese ports,
poor weather conditions and administrative disruptions have
tightened iron ore supply since the end of last year.
Iron ore price volatility has
been accentuated by factors ranging from heavy rains in Brazil
to cyclones in Australia to a continuing iron ore export ban in
India, thus taking control of prices out of suppliers
High iron ore tags have also
been supported by demand.
Chinese government investment
plans include more than 700 billion yuan ($111 million) of
promised spending on infrastructure, while other construction
projects have seen steel mills replenish stocks ahead of the
Chinese New Year.
"The announcement of the
stimulus package meant that steel mills started restocking at
the end of the year and, thus, pushed the annual iron ore price
rally earlier than usual," Metal Bulletin Research analyst
Valentina Burrai said.
With rigid supply and demand
dictating that iron ore transactions be made regardless of how
many cargoes are available, the larger disconnect between steel
and raw material prices is understandable, according to
"Its the available cargo
that makes the spot price," Burrai said.
Steel prices, undergoing several
seasonal cycles across the year, have moved down or remained
static amid weak demand and a lack of construction activity in
"Iron ore prices match that
(steel cycle) demand but also have a cycle of their own, and
its when those two cycles dont match that steel
mills can face the worst margin squeezes," Moore said.
Struggling to match high input
prices with lower prices on their products, mills have found
the direct link and margin between iron ore and steel prices
difficult to maintain.
But relief could be in sight, as
the market expects Chinese steel demand to return.
"Steel prices are rising slowly
as people wait for consumption to grow. In my opinion, they
will rise in spring," a steel analyst in Beijing said.
With the construction season
expected to kick off after the Chinese New Year, most analysts
are bullish on the first-half 2013 outlook.
Standard Bank predicts iron ore
prices will average $150 per tonne in the first quarter and
$138 per tonne in the second quarter, Moore said.
Spot iron ore prices had reached
a 15-month high of nearly $160 per tonne in early January.
Meanwhile, Goldman Sachs Group
Inc. expects Chinas steel production to grow 4.9 percent
in 2013, while the China Iron and Steel Association forecasts a
3.1-percent rise in steel demand this year (
amm.com, Jan. 24).
But it remains to be seen
whether this signifies a return to better-matched iron ore and
steel price cycles.
The short answer is "probably
not," but hopes are high that this will occur in coming months.
"Its a rosier prospect than in 2012," Burrai
A version of this article was first
published by AMM sister publication Steel