While the ASX will be up at the opening today, will more investors notice the biggest sell-off in iron ore prices for close to 18 months that happened last week?
Global iron ore prices are now in a correction – falls of 10% or more from their most recent peak for the key 62% Fe fines product exported from Australia’s Pilbara mines while the lower grade 58% Fe fines has slumped more than 25% and that puts it well into a bear market.
The price of 65% Fe fines from Brazil have also corrected – down nearly 12% with the better price performance thanks to the continuing high demand from Chinese mills for the higher quality raw material which produces more steel for less pollution.
The slide in 62% and 58% Fe fines prices (Fortescue produces some of the lower grade ore) comes on top of weak production and sales data from Rio Tinto in the June half and quarter and a solid though average effort from BHP. That helped boost prices in May and June but not so far in July.
Certainly some investors did note the weakening news flow for iron ore last week with shares in the three iron ore majors losing ground. That was despite quarterly, yearly and half year reports showing BHP and Rio doing OK. Fortescue, the third, is due to release its June quarter and financial year production and sales data this week.
As a result BHP shares fell 1.1% last week, Rio shares fell 2.6% and Fortescue shares lost 2% – compare these falls with the 0.6% rise for the ASX 200 and record closes on Thursday and Friday.
And yet the potents are there for tougher times for the iron ore sector and Australian mining and exports in coming months as the Chinese government starts to enforce production and pollution cuts that should see a fall in December half year crude steel output.
Although when it comes to the country’s steel sector, the government huffs and puffs about cuts and nothing much changes in the end.
The price of 62% Fe fines delivered to northern China dropped $US21, or just on 10% last week to $US201.33 on Friday. The 58% Fe fines price in China closed at $US165.45 a tonne, down around 8% for the week, while the price of 65% Fe fines from Brazil lost 8% to close at $236.10 a tonne
Since the highs on May 12/13, iron ore prices have slumped sharply – 62% fines are down 15% from the peak of $US237.57 (a correction), 58% fe fines have slumped more than 25% (a bear market) from the high of $US207.22 and the price of 65% Fe fines are down 11.6% from the high of $US267.80.
And the most active September iron contract on China’s Dalian Commodity Exchange has fallen roughly 10% from last week, its biggest weekly drop since February 2020, and is now off 17% from record high reached in May.
The falls as more news reports signals moves by China to increase efforts to reduce output of the construction and manufacturing material in line with its carbon emission reduction goal.
Authorities have asked steel mills to ensure their output this year will be no more than 2020 volumes (1.065 billion tonnes in total), after first-half production rose roughly 12% (as we warned earlier this month about the likely impact in second half output) to 563 million tonnes.
In China’s major steelmaking city of Tangshan, “authorities have vowed to punish violations of production restrictions”, repeating threats made in April and May.
“Some independent rolled steel firms halted production in early July, with more closures expected in coming months,” the reports said.
Meanwhile global steel production rose 11.6% year-on-year in June as crude steel output rose to 167.9 million tonnes during the month, the World Steel Association said on Friday.
China’s steel output rose 1.5% from a year ago to 93.88 – in May it hit a record 99.5 million tonnes.
Year on year, Indian steel output surged by 21%, while production in both Japan and the United States jumped from June, 2020’s Covid-depressed levels.
Global crude steel production rose to 167.9 million tonnes in June, up 11.6% from a year earlier, World Steel Association data showed on Friday.
The data released covers the 64 countries which report to worldsteel, and which accounted for around 98% of world crude steel production in 2020.
All regions and major producing countries recorded higher production in June from a year ago, as demand grew.
After China’s 93.9 million tonnes, the next biggest producing country, India, produced 9.4 million tonnes of crude steel in June, up 21% from a year previously. Japan produced 8.1 million tonnes, up 44%.
Output in the whole of Asia and Oceania was 122.5 million tonnes in June, up 6.4% from a year ago but down from more than 128 million tonnes in May.
The US produced 7.1 million tonnes, also up 44% from a year previously. Russia is estimated to have produced 6.4 million tonnes, up 11%. South Korea produced 6 million tonnes, up 17%.
Germany, the EU’s biggest producer, made 3.4 million tonnes, up 38% on June 2020. Turkey also produced 3.4 million tonnes, up 18%. Brazil produced 3.1 million tonnes, up 45%. Iran is estimated to have produced 2.5 million tonnes, up 1.9%, according to worldsteel.
June’s output of 167.9 million tonnes compared to an output of 174.4 million tonnes in May, which was a longer month.
In the six months to June 30, world production reached 1.003 billion tonnes of crude steel, up 14% on year.
Iron produced in blast furnaces in June amounted to 112.88 million mt, and production of direct reduced iron was 8.28 million mt, worldsteel said.
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Apart from iron ore’s slide, commodity prices did OK last week.
Oil prices gained ground, rebounding the slide after OPEC+ agreed to ease its production cap over the next year or more.
The release of US inventories indicated a recovery in fuel demand (though oil stocks rose to 439.7 million barrels, up 2.1 million barrels) while quarterly airline results (United, American and Southwest) suggested that air traffic was picking up.
Brent crude oil is trading at USD 72.07 a barrel, easing in the afternoon and after-hours Friday. It was up 0.2% for the session and 0.4% for the week.
Brent crude settled at $US74.09 a barrel to be up around 1.2% for the week.
US oil rig rose seven to 387, according to Baker Hughes’ weekly report on Friday. That saw a rise of 7 in the number of all rigs in use in the US to a total of 491.
US output was estimated 11.4 million barrels a day for a second week by the Energy Information Administration.
Meanwhile gold remained over the $US1,800 mark but is struggling to build positive momentum given every opportunity by the rise of the new Delta Covid variant.
Interest rates remain low though as bond market investors fret about the new Covid infections, rising inflation, weaker activity (unrealised as yet in the US and now the eurozone).
The US dollar remains firm, the Aussie dollar ended under 74 US cents at 73.66 after dipping under the 73 US cent level for the first time in eight months earlier in the week.
The Chinese government has again announced its intention to sell off part of its copper, aluminium and zinc stocks in order to curb price inflation.
The impact on metal prices was minimal – for example, copper rose 3.5% over the week and by 1.2% on Friday, settling at $US4.40 a pound and then rising in late trading to end at $4.4550 a pound.
In agricultural commodities, the price of coffee jumped by nearly 13% in five days, due to the capricious weather in Brazil, where frost is rampant – a week or so after drought was the big driver of a rise in prices.
The severe drought in southern Brazil and much of Argentina has forced a big 20% to 25% cut in the size of grain and other cargos using the Parana River export ports. Water levels in the Parana River have fallen to multi year lows because of the continuing dry.
The prices of corn, wheat and soybeans all fall last week on the Chicago Board of Trade, even though there’s continuing concern about the impact of the western drought on yields and eventual production levels.
