Iron ore comes under fire
A prolonged stretch of declining prices suggests this could continue for some time, which can then become a worry as lower iron ore prices lead to weaker steel prices
Global steel production data is a picture of growth, with output in August growing by 6.3% over a year ago, and China’s steel production rising by 8.7%, according to the World Steel Association. While there had been fears that China’s steel output will slow down as it moved to limit exports, domestic demand has been robust and has kept consumption going. But its steel output could get affected in the coming months.
So far, there is little impact on China’s overall steel output of any measures its government may have taken to shut down polluting steel plants.
China’s output in August at 74.6 million tonnes (mt) was slightly higher than July’s 74 mt. The rest of the world, too, is producing more steel, with the August number coming in at 3.7%, compared with 3%. Higher steel output normally augurs well for iron ore, but September has seen prices under pressure. Iron prices in Qingdao have fallen to $63.6 a tonne on Friday, according to Bloomberg, which is a decline of 18% over its early September level. Prices are back to their July levels now.
A prolonged stretch of declining prices suggests this could continue for some time, which can then become a worry as lower iron ore prices lead to weaker steel prices.
What could be hurting ore prices? Bloomberg reported that investors fear environmental checks in China may affect steel output, even before the winter curbs set in. The market will also enter a seasonally weak period, and that could be a signal for ore prices to ease off. If so, the increase in iron ore prices may have hit only a short-term pause.
But there could be longer term concerns as well. Recently, the minutes of the latest monetary policy meeting of the Reserve Bank of Australia reveal its members’ concerns that China’s steel output may have peaked and that limits future increase in iron ore demand. Against this, the growing supply of iron ore poses a risk to prices. They did note that India has the potential to raise demand for commodities, given its increasing investments in housing and transport infrastructure.
Steel output data for September and the coming months should provide clues about whether the worries on demand for iron ore are justified. Seaborne coking coal prices, too, have turned weak in September.
Domestic steel producers will welcome a respite from rising raw material prices as this was one reason that had affected their costs in the June quarter. Higher raw material prices also result in higher steel prices, which is more important for margins. If the fall in input prices sustains, steel prices will weaken. Already, steel rebar futures in China have been falling. Again, this situation needs to be watched as curbs on China’s steel output can also mean tighter steel supplies, which can support prices, too.
The weak outlook for iron ore prices will weigh on the outlook for NMDC Ltd and the iron ore division of Vedanta Ltd. NMDC’s shares were down 5% on Friday and has lost 12% since its 8 September high. Friday saw all steel shares fall on a day when the broad market declined, and the metals index fell by 4% on BSE.