Iron Ore Defies Falling Global Commodity Prices

Global stock markets are down from their recent peaks and prices for commodities such as crude oil, gold and copper are also falling. But iron ore and coking coal are bucking the trend thanks to China, the world’s largest consumer of the stuff.

Benchmark Australian spot prices for iron ore are near $80 per ton, a 30% rise versus late October. So far this month, prices are up 6%. Spot prices for coking coal have also risen 5% in the first half of February, topping $230 per ton, Nikkei reported.  

In 2017, China’s economy grew at a faster pace for the first time in seven years, expanding by an inflation-adjusted 6.9%. That is partly thanks to higher exports. Heavy spending on infrastructure ahead of the Communist Party’s congress late last year provided an additional lift.

Chinese steel exports shrank on the year for 18 straight months through January. “The fall in China’s exports shows that its domestic demand is strong,” said Kiyoshi Imamura, managing director of Tokyo Steel Manufacturing.

Infrastructure now accounts for more than 20% of China’s total investment, a record. That points to continued firmness in steel prices.

China is pushing to curb output further. In mid-November, the government ordered steel companies to cut production in an effort to clean up the air in 28 northern cities. That prevented a glut and kept the price from falling. To sustain the cuts and raise efficiency, Chinese ironworks are increasingly using Australian ore, which has a high iron content.

In January, China’s imports of iron ore totaled 100 million tons, jumping 19% from the previous month’s 84 million tons, and up eight million tons, or 9%, from the same month a year earlier.

“We are maintaining our bullish three-month iron ore target of $85 per ton,” economists led by Goldman Sachs’ Jeffrey Currie wrote in a report on Feb. 9.

 Relatively Illiquid

Prices for steel inputs are rising in part because of the market’s structure. Wood Mackenzie APAC Metals and Mining research director Robin Griffin said: “Coking coal is a relatively illiquid market, and is not yet a commoditized product. Price discovery is still typically done by price reporting agencies through surveys of buyers and sellers. The exchange trade is small. Because of the nature of the trade, prices tend not to be affected by macroeconomic trends, or indicators such as oil prices.”

Iron ore futures are also climbing on the Dalian Commodity Exchange, the world’s largest trading platform for iron ore. Rumors suggest speculative money is flowing into the Chinese futures market in anticipation of a further increase in steel prices, which is also pushing up prices for physical steel materials.

Rising raw material prices could dent profits at the world’s major steel companies, which have been on the mend. Shinichi Okada, executive vice president at Japanese steelmaker JFE Holdings, predicts “the metal spread will fall in the first three months of 2018 compared with the October- December quarter.”