Iron Ore Values Plunge as China's Holiday Season Approaches, Dangers Loom

Iron Ore Market Dynamics Amid China's Week-long Holiday Break

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As China prepares to enter a week-long holiday break, the iron ore market is buzzing with an elevated price trend, albeit with mixed cues regarding the demand from the world's foremost importer of this crucial steel-making component.

On the trading floors of Singapore, iron ore futures SZZFc1 wrapped up at $120.77 per metric ton this Thursday, marking a slight rise from the previous close of $120.67.

While the price has taken a modest dip from the recent zenith of $123.37 a metric ton on Sept. 15, it's still riding high at 17% over the trough of $103.21 hit on Aug. 3.

This price rhythm resonates with the domestic contracts on the Dalian Commodity Exchange DCIOcv1, which concluded at 851.5 yuan ($116.64) a metric ton on Thursday, slightly above the prior close of 844.5 yuan.

Though Dalian futures have receded from the Sept. 15 apex of 873 per metric ton, they’re up by a lively 18.6% from the recent low of 718 yuan on Aug. 9.

The recent price upsurge has its roots in robust imports, dwindling port inventories, and a spark of optimism ignited by some promising indicators in the crucial housing sector, like the surge in new bank loans.

However, this positive vibe is tempered by probable slackening of imports in September, anticipated official measures to cut back steel production in the upcoming quarter, and the ongoing struggles faced by certain property developers.

China Evergrande Group 3333.HK is entangled in actions initiated by offshore creditors aiming to liquidate the financially embattled major property developer, who is in the midst of restructuring offshore debts totaling $31.7 billion.

Worries stemming from the residential property realm threaten to overshadow China's economic revival, particularly impacting the iron ore and steel industries, as they cater to nearly a third of domestic steel demand.

IMPORTS TAKE A PAUSE

It appears that the pace of China's iron ore imports might have relaxed a bit in September following a robust performance in August.

The anticipated import volume hovers around 96.6 million metric tons in September as per commodity analysts Kpler, while LSEG data sets the figure slightly lower at 96.4 million.

This shows a decline from the 106.42 million metric tons recorded in August, the pinnacle so far in 2023 and a figure not seen since October 2020.

Historically, it's noted that the import figures typically shrink in October compared to September, due to the annual week-long National Day festivities in China.

A consistent trend of lower imports in October than September has been observed every year since 1999, according to the official customs data.

The determinant for China’s iron ore imports and steel production in the ensuing months hinges on the directives from officials to steel manufacturers.

Should Beijing resolve to stabilize steel production in 2023 at 2022 levels, it implies a lowered production in the year's concluding four months compared to its outset eight.

Data reveal that crude steel output touched 712.9 million metric tons in the initial eight months of the year, averaging 89.1 million monthly.

With a total steel production of 1.01 billion metric tons in 2022, maintaining the same level necessitates a production of 297.1 million in the closing four months of 2023.

This translates to a monthly quota of 74.3 million metric tons from September to December, indicating a significant cutback from the monthly average output witnessed earlier this year.

Nevertheless, there's no assurance that a cap on steel output will be instituted, as Beijing might opt to sustain high production levels to spur economic growth and bolster steel product exports.

On the brighter side for iron ore outlook is the reduced port inventories, with figures from SteelHome SH-TOT-IRONINV indicating a dip to 110.65 million metric tons in the week leading to Sept. 22, marking the lowest since July 2020 and falling below the 137.8 million from the same week in 2022.

This suggests a potential for import augmentation to replenish inventories, although the prevailing high prices might dissuade traders from scheduling cargoes.

All in all, several factors could potentially put pressure on iron ore prices, with the fate of China's steel production in the fourth quarter being a crucial determinant.

Source : Reuters (Reporting by Miral Fahmy)