Iron Ore June 2017
Prices Impacted by Scrap Steel and Production Restriction

The Iron ore spot price declined further in May, despite steel prices upward momentum. The impact on iron ore prices resulting from the elimination of induction furnaces in China is not expected to last. In May, the price spread between 62% Fe and 58% Fe is expected to shrink in second half of 2017 as monsoon season will likely affect Indian supply.

The iron ore spot price (CFR China, 62% Fe fines) declined further in May, falling 12.2% from previous month to average US$62/t. Prices went below US$60/t to reach US$57.9/t in late May, lowest since October 2016. Decline in iron ore prices was in contrast to steel prices, which have been trending upward in May. In particular, Chinese steel rebar prices reached a five year high following increased infrastructure spending and potential hedging or restocking activities by Chinese steelmakers due to the elimination of induction furnaces in China. This is likely due to anticipation of a shortage of rebar as induction furnaces mainly produce rebar from scrap.

The price decline in May largely reflects a correction from spikes in the March Quarter, which were fundamentally unsustainable. Prices were pressured by high iron ore port stockpiles in China, which have grown by around 20% since the start of the year. In addition, steel production restriction in Hebei from early May to mid-May due to “One Belt, One Road” Summit has also dampened iron ore demand.

China’s recent effort in the elimination of induction furnaces could lead to short term substitution of iron ore consumption by scrap steel. However, the impact on iron ore prices is not likely to last as the loss in steel production from induction furnaces is expected to be replaced by higher utilisation rate of existing steel operations. Iron ore prices is expected to recover when these scrap steel stockpiles are exhausted and loss in steel production from induction furnaces is fully replaced by other steelmaking routes. According to China’s National Bureau of Statistic, Chinese crude steel production increased by 4.9% year on year in April, while pig iron production increased by 5.4% year on year.

In May, the price spread between the 62% Fe and 58% Fe iron ore products widened slightly, at around 73%. Chinese steelmakers preferred medium to high grade iron ore product to increase productivity amid improving steel margin. Going into the second half of 2017, price spread is expected to shrink as coking coal prices correct and low grade supply from India will likely be impacted by monsoon season in India from July to September. China imported 14Mt of iron ore from India between January and April 2017.