High volatility

Trending higher since late 2018, iron ore prices are benefitting from China’s steel sector supply side reforms – namely its attempt to eliminate spare capacity. As markets have been tighter, the last three years have seen greater volatility as the benchmark Platts 62% Fe IODEX hit an all-time high at $233.1/dmt in mid May this year, before falling dramatically to just over $100 in October.

Over the first ten months of 2021, the annualised volatility of the iron ore benchmark has been close to 54%, higher than that of most other metals. Historically, this is not out of context, but seems more volatile given the relatively stable period during 2015 to 18, which was near the bottom of the cycle.

Stifled Supply

China remains the marginal commodity buyer globally, and it has been the primary consider behind rising global iron ore prices. Demand is a derivate of its steel production of course, which has risen steadily to 1.065 billion mt in 2020, from 928 million mt in 2018, regardless of the COVID interruptions. Downstream demand remains firm, despite hard pressed production restrictions in the second half of the year so as to ensure nationwide decarbonisation targets and power rationing purposes are met.

India has also experienced significant growth in its steel sector, achieving an annual crude steel production of 100 million metric tons in 2019. However, this growth has been hampered by the COVID-19 pandemic, and the supply of iron ore has not kept pace with the rising demand. Brazil, in particular, has faced challenges in meeting its production targets due to mining accidents, extreme weather, unexpected maintenance, and the pandemic.

Data from Platts cFlow shows that Brazilian miner Vale’s export volume decreased by 18.9% in 2019 and 2.4% in 2020. The top four Australian miners were unable to fully compensate for this shortfall, with their exports increasing by only 0.5% in 2019 and 3.2% in 2020. Despite these challenges, Vale aims to reach a production capacity of 370 million metric tons of iron ore by the end of 2022. Given the dramatic rise in demand, many observers expect the market to remain tight until new production from West Africa becomes available.

China Policy

Steel mills in China are now more responsive to policy changes and profitability fluctuations, quickly adjusting their preferences for different grades of iron ore. In recent years, mills have had to adapt to various policies, including localized output and logistics controls, clear skies rules, nationwide capacity reductions, and unscheduled ecological and environmental inspections. Recently, high profit margins have led to a preference for high-grade, low-contaminant iron ore to maximize pig iron production. The Platts 65% Fe and 62% Fe indexes increased by 46% and 42%, respectively, from the start of 2021 to May, before retreating, while the 58% Fe index rose by 29% during the same period. This preference for premium cargoes has resulted in better spot market liquidity for high- and medium-grade iron ores compared to lower grades.

Specs and Performance

The pandemic has affected regional steel markets differently, leading to a staggered rebound in iron ore demand. Sellers have prioritized shipping cargoes to regions that recovered fastest to meet blast furnace demand, while other regions continued to face lockdowns and plant closures. This has required traders to closely monitor global trends. The varying preferences for specific types of ore have forced traders to adopt a more brand-differentiated approach, necessitating a deep understanding of global brand specifications and the technical performance of each iron ore product.

Decarbonization

The entire supply chain, from mining to shipping to steelmaking, is increasingly focused on decarbonization. ESG-conscious investors are driving miners to review their operations, including truck fleets and power sources. The challenges for steel mills are even greater, requiring either significant technological breakthroughs or the widespread availability of cleaner hydrogen. Addressing steel emissions is a global issue that demands both global and local solutions. Likely steps include increased scrap use, higher-grade raw materials in production, and technological upgrades. In September 2020, China announced its goal of becoming carbon-neutral by 2060, signaling its commitment to this path as the world’s largest steel producer.