The bearish risks for iron ore are mounting with Chinese steel output and construction slumping, port inventories building and a wave of new supply en route to China.

The spot price of benchmark 62% iron ore for delivery to north China, as assessed by commodity price reporting agency Argus, has so far taken the negative news in its stride.

It ended at $124.10 a tonne on Monday, down a touch from the prior close of $125.05, but still above the recent low point of $100.45 from Sept. 20.

Since iron ore’s sharp fall from an unsustainable record high of $235.55 a tonne in May, the steel-making ingredient has traded in a range of between $100 and $137 for the past two months.

This is a price more in line with a balanced market, where demand from China, which buys about 70% of global seaborne iron ore, remains firm and supply from top exporters Australia, Brazil and South Africa is close to potential.

However, there are increasing signs that the comfortable balance of the past two months is under threat from both lower Chinese demand and higher supply.

China’s daily steel output fell in September to the lowest since December 2018, with a total of 73.75 million tonnes produced in the month, down 21.2% from the same month a year earlier, and 8.6% below August’s daily average.

The faltering steel output has been blamed on production curbs as a result of Beijing’s aim of cutting pollution and energy use, and ensuring that annual steel output doesn’t exceed last year’s record 1.065 billion tonnes.

If that target is to be met, steel output in coming months will also have to be constrained, given that in the first nine months of 2021, it was up 2% from the same period last year, coming in at 805.89 million tonnes.

For January to September, daily output averaged 2.95 million tonnes. To keep 2021 steel production at no more than last year’s level, daily output during the final three months can be no more than 2.82 million tonnes.

Demand for steel is also being called into question, with China’s new construction starts slumping for a sixth straight month in September, dropping 13.54% from the same month in 2020.

It was the third month of double-digit declines and the down streak is the longest since March-August 2015, when China’s vast property sector was last in a downturn.

IRON ORE SUPPLY
If the demand outlook for steel raises some questions, the supply of iron ore asks a few more.

The rally to the all-time high was largely driven by then record-high Chinese steel output, weather-disrupted supply from top exporter Australia and coronavirus constraints in number two shipper Brazil.

Supply has largely recovered from its earlier wobbles, and the increasing availability of iron ore is showing up in inventories at Chinese ports.

These rose to 139.7 million tonnes in the week to Oct. 15, the most since April 2019 and up from the 2021 low of 123.95 million in late June.

A flood of iron ore is also on its way to China, with vessel-tracking by both commodity consultants Kpler and Refinitiv showing October arrivals may be the highest month this year.

Kpler is estimating 121.3 million tonnes of iron ore will arrive in China in October, while Refinitiv is forecasting 118 million.

Even allowing for some of the expected cargoes to be pushed into November’s official customs data, it does look like China’s iron ore imports this month will be strong compared with the recent trend, which saw arrivals of 95.61 million tonnes in September and 97.49 million in August.

Overall, the dark clouds are gathering over the near-term outlook for iron ore, and the question for the market is how long the spot price can remain sanguine.
Source: Reuters (Reporting by Clyde Russell; Editing by Richard Pullin)