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Iron Ore In A Bull Market As Demand For Construction Steel Soars In China

Iron Ore In A Bull Market As Demand For Construction Steel Soars In China

 

News is brought to you by Mr. Shailesh Karia

 

Published on 6th November, 2018

 

China`s manufacturing industry might have slowed slightly this month but its construction sector could be in the first stages of a government-sponsored boom if a 20% rise in the price of iron ore over the past three months is a guide.

 

Because it is only used to make steel, iron ore is a first mover commodity when an economy picks up or slows down with the increase in the benchmark price for ore containing 62% iron to $76.70 a ton a pointer to a potentially significant development in China which consumes more than half the world`s iron ore. 

 

In early July, as uncertainty was brewing about the effects of China`s trade war with the U.S. the iron ore price slipped to around $63/t, down from $79/t in February.

 

The latest upward move, back almost to where it was earlier in the year, has taken iron ore miners by surprise, not just because it was unexpected but also because of a subtle change in the type of ore China is buying. 

 

For much of the past two years China has been demanding high-grade ore, paying a hefty premium for the best ore while hitting low-grade producers with big discounts.

 

Big Miners Are Winners

Big miners such as BHP, Rio Tinto and Vale are the major beneficiaries thanks to the high-grades of the ore in their mines. 

 

The case for high-grade ore has been supported by toughening environmental clean-up rules with premium raw materials, including coking coal, leaving less waste and reducing the time that a blast furnace needs to operate, which cuts emissions.

 

The high-grade policy saw some low-grade mines close and others, such as those operated by Australia`s third-ranking iron ore miner, Fortescue Metals Group, get paid substantially less than the benchmark. In the September quarter Fortescue received an average of $45/t, or 67% of the benchmark average.

 

Low-Grade Ore Returning To Catch The Boom

Perhaps significantly, the latest price for Fortecue`s ore crept up by 2% as a change started to develop in China`s steel-making industry with mills accelerating production ahead of the annual winter slowdown (when anti-pollution rules are strictest) with the increase leading to the use of whatever ore was available. 

 

As well as using more low-grade ore to meet steel demand there was a significant shift in the type of steel being turned out with hot-rolled coil, that makes its way into vehicles and appliances, replaced by a big increase in reinforcing steel (rebar) used by builders.

 

This shift in the type of steel being made in China, and the overall increase in steel production, fits  with a theory that government stimulus of the construction sector is underway to maintain overall economic momentum as the export of factory-made goods falters.

 

Rebar, which is a very basic steel, traditionally sells at a discount to the higher quality hot-rolled coil, but last week the two types of steel were priced in reverse with rebar more expensive than hot-rolled coil. 

 

What`s happening in the Chinese steel industry has investment bankers scratching their heads.

 

Macquarie, an Australian-based bank, described the situation as "iron ore`s odd price kick". 

 

The bank said in a research report that said there were three issues responsible for iron ore rising when most other commodities and equity markets were weakening.

 

The pre-winter rush is the seen by Macquarie as the major factor with steel mills accelerate their operations to produce as much steel as possible before government environmental regulations force a production slowdown during the so-called heating season when levels can soar. 

 

Cost management has encouraged steel mills to switch back to lower-grade ore, while maximizing capacity utilization has encouraged mills to work harder to avoid being targeted for government-led closure or forced amalgamation with a rival.

 

"The Chinese Machine Is Still Working Very Well"

For iron ore miners the unexpected surge in demand from China`s steel industry is a bonus.

 

The chief executive of Rio Tinto, Jean-Sebastien Jacques said earlier today in a Bloomberg Television interview that China`s stimulus of its economy was supporting raw material demand. 

 

"The Chinese machine is still working very well," Jacques said. "The government is putting more money into the system and is pushing infrastructure."

 

Source : https://www.forbes.com//

 





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