FT Alphaville
Whether it's oversupply or reduced demand may not matter - the price is down.
Iron ore, an alternative view
Posted by Izabella Kaminska on Aug 31 18:45. 9 comments | Share
The following comes from Icap’s shipping team on Friday:
The carefully engineered economic slowdown in China is a fact clearly expressed in the recent readings of some key economic indicators. However, we fail to see any affirmative sign of a weakness in the structural demand for iron ore and other raw materials key for industrial output.
Wait… what?
Wasn’t the spot price of iron ore supposed to be down some 35 per cent year to date?
Let’s allow Icap to explain their thinking:
The imports of iron ore into China in H1 2012 are 9.3 per cent above the same period last year and domestic crude steel production is up 1.5 per cent y-o-u. Additionally coal imports, both thermal and metallurgical, for Jan-July period are up 51.3% y-0-y… All this is perfectly in line with our own projections for trade in 2012, which have changed much since Dec 2011.
In other words, if there is any slowdown in China, it is certainly not negatively affecting the major bulk trade flows into the country and therefore the related shipping market. In fact, it is quite the opposite. If we also compare the y-o-y result of iron ore imports into South Korea and Japan, the picture becomes even more confusing for some — Japanese iron ore imports in H1 2012 as up 4.4% and South Korea imports are up 4.7% compared to H1 2011.. No surprise global steel production is up nearly 1% y-o-y then!
Which means if anything we’re seeing a supply side shock, which most importantly is not impacting consumption.
As Icap go on:
We also find it astonishing that very few, if any, of the market observers even mention the role which the supply of commodity plays in the price formation mechanism. All major miners are recording record output and export numbers. Australian iron ore exports for example are up 16.5% y-o-y (Jan-June period), Brazil is up 2.5%, while Saldanha Bay is up nearly 11%!
All this combined with the fact that demand for iron ore outside of Asia is subdued, points towards a very different picture. In other words, we believe that it is not weak demand for iron ore but the abundant supply which is causing the current price squeeze.
Though there’s no denying that much of that ‘consumption’ is ending up in inventories sitting at port:
Bar the metal’s possible use as collateral, it seems that for now at least ‘too much supply’ is translating into hoarding tendencies, rather than satiation.
