Steel Products Prices North America

Will Iron Ore Collapse Cause Chinese Domestic/Export Steel Prices to Drop?

May 1, 2014

Iron ore prices continue to boil and bubble, with the key word being bubble. At the beginning of April, 62% Fe fines were trading at $117 per dry metric ton (dmt). They peaked nine days later at $119.4/dmt and since then the air has been leaking out of the bubble. On Wednesday, iron ore prices reached their low for the month as the pace of the decline has been increasing over the past week due to the Chinese banks once again refusing to loan money to steel mills as they are unable to repay existing loans. At the same time the government has been cracking down on loans using iron ore as collateral. The net result has been an increase in inventories – iron ore at Chinese ports now stand at record levels of 112.63 million metric tons and, according to SMU sources, growing.

According to Forexlive, “China Banking Regulatory Commission has started a crackdown, likely to result in a higher deposit margin requirement for banks to supply letters of credit for iron ore import. It would impact on iron ore importers, forcing them to dump their iron ore holdings in the market to meet liquidity demand. It would also impact upon Chinese steelmakers, who would see input costs rising due to having to pay more as deposit margin.”

The month ended with iron ore indices referencing 62% Fe fines at $105.4/dmt and 58% Fe fines at $99.3 both down from the prior day and both close to their 52 week lows (62% being $104.7 and 58% being $95.1 according to TSI).

Our active iron ore trading source in Asia provided the following insights to SMU on Wednesday, April 30, 2014, “Platts down USD2/dmt today and 62% pegged at USD105/dmt CNF FO! I think I gave you the banking info before anyone came out with this as stated in your Bulletin [Steel Market Update]. It is going to get very nasty, John. Everyone thinks that if the Banks intervene it will help reduce Port stocks with Sell Offs. Does this make any logical sense at all? I advised that the large companies with mill JV’s are already taking the cheap ore from the ports and sending it to the mills to off take cheap steel, but they cannot sell the steel now, so even if the banks intervene and prices of ore are cheap, it really makes no difference as the mills nor the JV partners can find homes for the steel, so where is the ore going to go? Re-Export? What is going to happen is that Steel prices from China will drop drastically to export or sell domestically and then another round of Dumping cases will be filed.”

Our iron ore trading source advised SMU on Thursday morning (May 1st) that 40 percent of the iron ore inventories at the ports in China have “questionable” loan problems associated with them.

We asked our contact what he projects for iron ore prices over the near term and he responded, “We may see a short FLAT LINE with prices hovering at USD105.50/dmt CNF FO level, but if the banks squeeze, then it could be a fast trip down….”