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 hands.
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 analysts.
"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 winter.
"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 said.
A version of this article was first published by AMM sister publication Steel First.