Iron ore update - Supply response and China
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Top of the price cycle... but with no supply response
Considering the rise in Chinese steel prices this year, iron ore prices appear to be reflecting the more tight environment of 2007-2013 than recent history (Exhibit 1). However, one key difference is that in 2011 there were c. 500mt under construction from the majors vs. today's VALE recovery of 90mt and the long-dated, Chinese-led Simandou project. Otherwise, there is limited swing capacity in the offing with any material additions years away. With Chinese domestic production very unlikely to scale up to the position where it was pre-2014 the buffer for a tight environment is very small. Alongside the potential for Chinese steel demand to beat expectations we think the upside risks to iron ore prices stemming from RIO's guidance provides strong positive optionality. We would look to express this via VALE and secondarily through BHP and AAL in our London coverage.
Still positive vibes in China despite steel rollover
We are attending Mysteel's China trip where we visit steel mills, property developers and other market participants (virtually of course). The outlook thus far is positive with the normally circumspect start- of-year projections actually positive 2.5%-4% (RBCe 2.3%). It does appear that cold weather has finally brought with it the long-delayed winter slowdown, although restocking activity, especially in higher quality iron ores, remains strong.
Steel margins have fallen rapidly over the past week and this we understand is to do with logistical constraints hampering coal and coke shipments within China as parts of the key steel-making Hebei province are facing COVID-19 lockdowns. Certainly something to track, but any material curtailment of steel production would only serve to push steel prices (and likely iron ore prices) higher if there was to be a larger constraint. Although this could set up a roll in iron ore prices heading into Chinese New Year (leaving aside the much greater impact from any divergence in RIO's guidance) we continue to see positive demand dynamics through the first half at minimum.