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COLUMN-Iron ore outlook is finely balanced as supply picks up, China demand holds up: Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

* GRAPHIC-China's seaborne iron ore imports vs. SGX price: tmsnrt.rs/2F1jZNr

Oct 5 - The price of iron ore is increasingly poised between a recovery in supply from exporters and still-robust demand from top importer China on the back on stimulus spending driving steel consumption.

The return of supply, particularly from number two shipper Brazil, would in normal circumstances be a bearish indicator. But if 2020 has shown one thing, it’s that it’s a mistake to underestimate the impact of Beijing’s efforts to boost the economy in the aftermath of the novel coronavirus.

The spot price of benchmark 62 percent iron ore for delivery to north China MT-IO-QIN62=ARG, as assessed by commodity price reporting agency Argus, closed at $123.05 on Sept. 30, just ahead of a Chinese holiday week.

While this is down from the peak so far this year of $130.55 a tonne, hit on Sept. 9, it also represents a surge from the recent low of $114.45 on Sept. 23.

Iron ore is up 35% from the end of last year, and has been above $100 a tonne since late May, apart from a brief dip below in early June.

While the economic lockdowns imposed in China in the first quarter of the year to combat the spread of the coronavirus did hit prices, since then the trend has been largely a one-way rally.

Part of the story was worries over exports from Brazil, and to a lesser extent from number three exporter South Africa, given that both these countries were hit hard by the coronavirus.

However, there are signs that Brazil’s exports are recovering to pre-coronavirus levels, with Refinitiv vessel-tracking and port data showing shipments of 32.7 million tonnes in September.

The official data was even more bullish, showing exports of 37.86 million tonnes in September, up 18.7% from the same month a year earlier.

The Refinitiv data showed September shipments slightly below August’s 35.4 million tonnes, but well up from January’s 20.8 million, 21.3 million in February and 22.9 million in March.

South Africa’s exports were 5.5 million tonnes in September, the highest since January and some 48% higher than the 3.7 million from April - the nadir so far this year.

Shipments from number one exporter Australia have been largely steady in recent months, with Refinitiv data showing 74.5 million tonnes in September, up slightly from August’s 73.4 million and July’s 72.9 million.

CHINA HOLDS UP

On the demand side, China’s appetite for iron ore has remained resilient, with Refinitiv data pointing to seaborne imports of 96.1 million tonnes in September.

Official data for September has yet to be released, and may show a higher figure than the Refinitiv data given it will include overland imports from neighbouring countries such as Russia and Mongolia.

In the first eight months of the year, China customs data showed imports of 759.91 million tonnes, an 11% increase over the same period in 2019.

The surge in iron ore imports has come as China’s steel production accelerates. August’s 94.85 million tonnes set a record high.

While the global economy is still struggling to recover from the coronavirus pandemic, China appears to have achieved the much-vaunted V-shaped recovery. The key manufacturing Purchasing Managers’ Index rose to 51.5 points in September from 51.0 in August, staying comfortably above the 50-mark that separates expansion from contraction.

If there is an area of concern for the broader iron ore and steel sectors in China, it’s that the high price of iron ore is cutting profit margins for steel makers.

The margin for benchmark steel rebar dropped to $19.83 a tonne in early September - the weakest in a year and almost half of what it was in August, S&P Global Platts reported last month.

Falling steel margins and the usual lull in construction over winter may see some pullback in iron ore demand and prices, especially if port inventories continue to rise.

Inventories at Chinese ports SH-TOT-IRONINV rose to 122.65 million tonnes in the week to Sept. 30, according to consultancy SteelHome.

This was the highest since March, although stockpiles are still below the peak in 2019 of 134.1 million tonnes, reached in late October.

Overall, the outlook for iron ore is looking more finely balanced currently than it has in recent months, with supply recovering and demand holding steady at high levels. (Editing by Kenneth Maxwell)

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