Iron ore defies covid-19 gloom with bullish supply

The Dalian Commodity Exchange’s most-active contract, for September delivery, ended at 723 yuan ($101.40) a tonne on May 22, up 25.2% since the start of the year in local currency terms.

The spot price for benchmark 62% iron ore delivered to China MT-IO-QIN62=ARG, as assessed by commodity price reporting agency Argus, ended at $97.30 a tonne on May 22, down slightly from the previous day’s close of $97.85, which was the highest price in eight months.

The spot price is up 6.7% since the end of last year, making iron ore a stand out performer among commodities, many of which have seen sharp drops in price as demand tanked after the spread of the novel coronavirus forced economies across the globe into lockdowns.

Iron ore’s relative outperformance shows the benefits of having bullish supply and demand stories, even if some holes can be poked in both narratives.

The supply issue is the fear that the spread of the coronavirus in Brazil will cut output and exports from the world’s number two shipper.

Certainly, Brazil is now one of the worst-affected countries by the pandemic, and it is expanding through the state of Para, which accounts for about one-third of the South American country’s exports.

There is some evidence of slower Brazilian exports, with vessel-tracking and port data compiled by Refinitiv pointing to shipments of about 20.8 million tonnes in May.

This would be down from the 29.1 million tonnes from the same month in 2019, although higher than the 23.2 million in April.

Shipments from Australia, the world’s top exporter, also look slightly softer in May, with Refinitiv estimating 64.6 million tonnes, down from 75.6 million in April and 77.9 million in May last year.

China demand

China, which buys about two-thirds of global seaborne iron ore supplies, looks to be keeping the demand side rolling along, with May imports estimated at a strong 96.8 million tonnes, up from 86.4 million in April.

However, the softer export numbers from Australia and Brazil suggest that June may see a bit of a pullback in China’s imports, given the lag between cargo departures and arrivals.

Much of the bullish narrative is built around China’s seeming rapid recovery from the coronavirus and expectations that Beijing will continue to prime infrastructure and construction spending, the two biggest steel-consuming sectors.

While the just-concluded annual parliament meeting didn’t reveal blockbuster stimulus plans, investors largely appear to be taking the view that Beijing will do enough to ensure that steel demand remains resilient for the rest of the year.

There are some other factors that have the potential to influence the iron ore price, such as the ongoing dispute between China and Australia, with Beijing seemingly expressing its unhappiness over Canberra’s calls for an international investigation into the origins of the coronavirus in the Chinese city of Wuhan.

This has already affected Australia’s exports of barley and beef to China, and reports of changes to inspections of iron ore cargoes raised fears that Australia’s biggest export to China was under some threat.

However, Beijing may have to tread carefully on iron ore, given the lack of options beyond Australia, although Canberra would be probably only using the threat of taxing or limiting exports of its top money-spinner as a last resort.

The current dynamics help explain why iron ore is a standout commodity, and it’s likely that the outperformance will continue until Brazil supplies are assured, or until there is evidence of slowing Chinese steel demand.

(Editing by Christian Schmollinger)