By Samantha James
AUSTRALIAN iron ore prices crossed the $50/t threshold in February, a price not seen for more than three months.
Prices were sub $40/t across December and January but a rally in Chinese steel demand in February was attributed to the end of China’s lunar holiday and the restart of steel production.
However, Argonaut Securities analyst Helen Lau said it was a seasonal uptick, and that an upsurge in demand for construction steel products would be hampered by excess supply.
“Low steel inventory, seasonal demand rebound after Chinese New Year and increasing utilization rate at blast furnaces has resulted in a rebound in steel and iron ore price,” she said.
“We believe this rebound in steel prices and iron ore will be short-lived in view of oversupply.”
Two of the four major global iron ore producers (known as the Big Four) – BHP Billiton, Rio Tinto, Vale and Fortescue Metals Group – have cut production in 2016.
Vale slashed almost 10 per cent of its output due to low prices and expected oversupply, forecasting between 340 million tonnes of iron ore and 350mt in fiscal 2016.
BHP Billiton’s 2016 share of total iron ore output in Brazil was pegged to fall 4 per cent from previous estimates to 237mt due to the Samarco dam collapse in November.
Although seasonality patterns, increased seaborne supply and reduced steel production in China had been cited as catalysts for a likely fall, analysts at Macquarie adopted a different view, suggesting risks had “evenly balanced”.
Macquarie stated that post Chinese New Year it expected steel output to move “sequentially higher”, assisting iron ore demand even without any restock.
“The key reason for our more optimistic view towards iron ore for 2016 was the speed at which supply has adjusted to lower prices,” Macquarie stated.
“Over the two years to 2015, the major five suppliers increased exports into the seaborne market by more than 240mt, but for 2016 they will add less than 30mt into the market.
“Moreover, recent earnings presentations from Rio Tinto and Vale have lowered guidance toward potential volumes for this year.
“While low-cost supply surged, high-cost supply has exited the market extremely quickly, with 125mt of seaborne supply exiting over the past two years and as much as 250mt of Chinese domestic ore exiting.”
Macquarie also pointed to low steel inventories in China, along with improved margins at steel mills, as factors underpinning the iron ore price.
“With demand expectations improving and steel inventory low, steel prices should continue to do well,” Macquarie stated.
The company suggested that should steel prices continue to recover, Chinese mills could look to increase production, leading to a scramble for iron ore supply at a time when inventories are at low levels.