No market has been left untouched by the escalating Covid-19 pandemic, but iron ore prices have proved relatively buoyant for the past two months compared with the price plunges we have seen in other commodities.
While copper and aluminium prices fell to four-year lows, the iron ore benchmark only dipped to a three-month low. The iron ore benchmark first dropped to nearly $80 per tonne in the beginning of February and rose to nearly $90 per tonne again two weeks later.
The strong performance in iron ore prices even stands in contrast to the more closely related Chinese steel prices, which have reached three-year lows. The trend for steel and iron ore prices to diverge has become more pronounced over the past two years, mainly due to supply disruptions in iron ore because of tailings dam failures and cyclones hitting major exporters. Seaborne supply volumes have yet to recover from those events.
Further price support after the outbreak of the novel coronavirus infection can be attributed to the strict containment measures taken by China, which not only restricted movement among the labor force but also hampered the transportation of domestic iron ore, driving both domestic and seaborne prices higher.
It was particularly challenging for mine operators to get their work forces to the mines, which were closer to the epicenter of the disease outbreak than many coastal steel mills.
Why have iron ore prices been resilient?
Iron ore prices have recently been supported by confidence in the recovery of the Chinese market. The restrictions in Wuhan province, where the virus was first recognized, have now been lifted and most of China is expected to return to normal activity by the end of this month, with a consequent rise in steel production.
Sentiment has also been boosted by the government’s promises of stimulus as well as the announcement by the People’s Bank of China that it would halve the reserve requirement ratio.
We can also see support for current iron ore price levels in the fundamentals, with Chinese pig iron production up by 3.1% year on year to 132 million tonnes in the first two months of the year. Looking at daily average production rates, it shows pig iron output only dipped below last year’s levels for three weeks after the coronavirus outbreak.
The pickup in activity is also visible in blast furnace utilization rates, which rose to 86% in the first week of April from 83% in March. Adding relatively tight seaborne supply to buoyant Chinese demand has created a recipe for strong price support in the short term.
Can iron ore prices linger above the $80 mark?
The potential supply disruptions in the global seaborne supply chain for iron ore as a result of the pandemic could keep prices elevated and constitute a large upside risk to our price forecast.
This is adding to a supply situation that was already tight because Brazilian iron ore exports have yet to recover from last year’s dam disaster. Brazilian exports have not yet been affected by the nationwide lockdown in that country, but miner Vale has announced that potential disruptions because of lockdowns around the world could reduce seaborne supply from Brazil by as much as 18 million tonnes this year.
The restrictions in Canada and national lockdowns in both India and South Africa could further hamper the seaborne supply of iron ore. Anglo American announced that the national lockdown in South Africa would affect 2-3 million tonnes at its Kumba iron ore operations this year, while it operates with half of its work force.
Our data shows that exports from these three countries represent about 150 million tonnes of iron ore, or around 10% of global seaborne supply. Further reductions of seaborne volumes as a result of national lockdowns could cause price spikes, despite slowing demand growth in China and retreating demand outside the East Asian country.
The upside risks from supply disruptions are likely to remain as long as the restrictions or lockdowns are in place. What could provide some respite to a tight market is that we are heading toward the end of the cyclone season in Australia and the rain season in Brazil. This should decrease the likelihood of supply disruptions triggering price spikes.
Furthermore, domestic run-of-mine output in China usually rises after the first quarter, which would ease the upside pressure on prices.
When will iron ore prices come down?
Although the price of iron ore has not fallen as much as other commodity prices since the virus outbreak began, the small price rise we saw in average prices in the first quarter still represented a weak performance, in light of fundamentals. The benchmark price for 62% Fe fines, cfr China, recorded the lowest first-quarter price rise in five years when it moved up by only 1.1% to $89.92 per tonne in 2020. The first quarter is usually the most bullish quarter for iron ore prices, so with that in mind, the past couple of months look particularly gloomy.
The price rise in the first quarter of the year is usually followed by a price drop in the second quarter, because demand growth for iron ore tends to slow down in preparation for a calmer summer season.
In the 10 years from 2009, the quarterly price drop in April-May has averaged 2% for the 62% Fe benchmark. This year, the downhill trend is likely to be further reinforced by a looming global economic downturn and slowing demand growth for Chinese pig iron.
China is by far the largest importer of seaborne iron ore, and Chinese pig iron production remains a key driver of iron ore pricing. We have revised downward our Chinese crude steel forecast by a few percentage points for the second quarter of 2020 and, although this is only a slight change, it adds to the bearish outlook for iron ore.
The downside risks to iron ore prices will increase with falling steel prices, which will threaten to squeeze the operating margins for steelmakers. Although there may be upside risks to iron ore prices in the short term, we anticipate a gradual downward correction in the long term when demand starts to decline.
Despite recent bullish sentiment in China, the uncertainty surrounding other economies is undoubtedly increasing. China has fought the virus, but its economy is not immune to a global downturn, especially in a very global steel market.
This article has been written by Fastmarkets' team of analysts, who are responsible for providing an independent view on market developments and forecasting their future performance.