IGO suspends annual dividends from Tianqi JV amid market downturn
The JV experienced a build in lithium hydroxide inventory at Kwinana over recent months.
On Tuesday the Northern China benchmark iron ore price lost 1.4% to $64.10 per dry metric tonne (62% Fe CFR Tianjin port), down more than 6% from 16-month highs hit last week according to data supplied by The Steel Index.
The steelmaking raw material still boasts a near 50% rise year to date and an almost three-quarters surge from nine-year lows reached mid-December.
Given that it forges half the world’s steel and consumes more than 70% of the 1.3 billion tonne seaborne trade, the iron ore market is reliant, more than any other commodity, on the Chinese economy.
The surge in iron ore over the past four months has come mainly on the back rapidly rising steel prices in China – up by a fifth just in April in never-seen-before volume – coupled with a reduction in output from domestic miners which have borne the brunt of the flood of new supply from Australia and Brazil.
Chinese authorities’ record on market intervention is not good and speculative bubbles inside the country tend to blow up spectacularly
Both these price drivers are in danger of reversing, potentially turning what has been a fairly orderly decline into a white knuckle one.
The spike in Shanghai rebar futures prices – 20% in three weeks in unheard of trading volumes – have prompted Beijing to intervene on the markets once again.
After authorities introduced trading curbs on stocks in 2015, many Chinese investors shifted their attention from the country’s equity markets to commodity derivatives. While the plunge on the Shanghai and Shenzen stock exchange had limited effect elsewhere in the world, six out of the world’s ten most active commodity contracts are now traded in Shanghai, Dalian and Zhengzhou.
And as last year’s stock market fiasco showed, Chinese authorities’ record on market intervention is not good and speculative bubbles tend to blow up spectacularly inside the country.
The country’s steel industry association has been consistent in saying any rise in production and prices would be unsustainable making it much harder to believe the recent frenzy was inspired by fundamentals.
Don’t expect support from Chinese iron ore miners either. Domestic output has been scaled back dramatically, falling below the target of Beijing policy makers to keep local ore utilization at 25% of the total. According to Platts Mineral Value Service, a Munich-based iron ore and steel research company, domestic iron ore’s contribution to the Chinese steel market has declined from 36% of market share in 2010 to around 22% in 2015.
The aggregate 35 million tonnes in possible lost production hardly changes the oversupply picture
Domestic iron ore output from an industry plagued by fragmentation, high costs and low grades (only around 20% Fe) has halved since 2013 and may dip below 200 million tonnes Fe 62% equivalent this year. Platts MVS says there may be as many as 840 zombie companies being propped up by local governments to save jobs and due to captive production.
Even if more Chinese mines shut down and the shift to seaborne ore continues, the seaborne market is not exactly short of tonnage. All-in-all new seaborne supply set to increase by approximately 245 million tonnes by end of 2018 according to Platts MVS.
The big three – Vale, Rio Tinto and BHP Billiton – last week lowered future production guidance, but the aggregate 35 million tonnes in possible lost production hardly changes the oversupply picture and the giants would still hit actual annual output records even at these lowered levels.
Citigroup’s analysts expect around an additional 75 million tonnes of iron ore this year to be shipped out of Australia, more than a third of which would come from Roy Hill. The Gina Rinehart mine has brought forward ramp-up plans and now expects to be producing at full annualized capacity of 55 million tonnes by the end of this year. Later this year, Rio’s board is likely to give the go-ahead to build Silvergrass which would add another 20 million tonnes of high-grade, low cost ore to the company’s Pilbara output.
The investment bank also forecasts 16 million tonnes of new iron ore supply from Brazil this year. And that’s even before Vale’s flagship S11D project in the Carajas complex comes on stream. The world’s top producer said the giant mine with annual capacity of more than 90 million tonnes is 80% complete and is expected to start shipping by the end of 2016.
