Steel Products Prices North America

Iron Ore Prices Retreating

March 10, 2016

The fundamentals of the Chinese steel markets do not support the recent surge in iron ore prices, according to Goldman Sachs and Li Xinchuang, deputy secretary of the China Iron and Steel Association (CISA). Iron ore prices rose earlier this week on an expectation that new government measures to stimulate the economy would result in a pick-up in construction demand. However, as the week has progressed ore prices have begun to retreat and the expectation is iron ore will drop below $50/dmt in the coming days.

Iron ore spot prices, which are based on trade with China which is the largest importing country for the steel making material, bottomed during the 4th Quarter 2015. At that time 62% Fe fines were reported to be trading in the mid to upper $30’s.

Recently the Chinese have returned from their extended Lunar New Year holidays and iron ore pricing began to spike as inventories had become too low, buyers pushed steel prices higher and buyers did some panic buying. This came to a head over the weekend and on Monday of this week as iron ore spot prices rose over $10 per dry metric ton, the largest one day move in its history.

Goldman Sachs reported earlier this week, “”We believe these rallies are not supported by the broader financial environment in China. China is credit-constrained and likely to use limited stimulus to promote consumption over investment through fiscal policy,” Goldman Sachs said. “The only real avenue for metals demand growth is through an improvement in property sales and prices that will eventually feed into higher construction activity, which the current data does not support and would be a difficult policy outcome to achieve by design,” the report added.

In a CNBC report Goldman Sachs advised, “”Barring a material increase in Chinese steel demand in the coming weeks, we believe steel production will decline in 2016 and seaborne demand has essentially peaked. The stream of announced production cuts is bound to resume, in line with long dated iron ore prices that have remained in the low to mid $30s for 2017 and beyond,” Goldman Sachs said.

Goldman Sachs is forecasting 2016 iron ore prices to average $38 a ton, down from its $43 a ton estimate in the first quarter of the year.”

CISA said steel consumption in China fell 5.4 percent in 2015 to 664 million metric tons. This was the first decline in steel consumption since 1996. CISA says China passed peak demand in 2014 and that steel production (not consumption) will struggle to get much higher than 800 million metric tons a year over the next few decades due to the slowdown in property and infrastructure growth.

SMU spoke with another metals and mining analyst this morning who told us, “Don’t pay attention to any numbers coming out of China right after the Chinese New Year.” He went on to say that their expectation is for iron ore prices to retreat into the $40’s within the next couple of weeks.