Iron ore spot price
According to Metal Bulletin, the spot price for benchmark 62% fines tumbled 8.4% to $64.25 a tonne, its largest one-day percentage drop since April 12 last year.
It is the largest recorded declines in the era of spot pricing for lower and higher grades ore too.
The prices are declining for several reasons, the first one is the steel entering a bear market, and in consequence, the steel prices decrease, it means that the margin for steel mills are decreasing almost to nothing. To counter that, steel mills in China produce steel with low-grade iron ore, which is cheaper. Unfortunately, it is the first time since three year that Chinese mills report losses.
Moreover, today, china has less incentive to produces steel and the producers are offloading existing inventory in the market.
Future of iron ore
Based on a report from iron ore and steel data Analytics Company, they found out that steel mills are putting pressure on iron ore producer to decrease there price in order maintain their margin.
The steel mills are hedging their forward production profit margin because they expect higher production due to less sintering cuts from the government.
It means that with demand of steel decreasing because of the cold season, however in the first quarter 2019, the mills will increase production can maintain their profit margin by buying input at lower price.
The future contract of iron ore are down warding slopping because it reflect the steel industry future contract such as steel rebar and steel scrap
Like iron ore, that’s also been reelected in coking coal and coke futures on Monday with the most actively-traded contracts sitting at 1,289 and 2,137 yuan respectively, down from 1,321.5 and 2,170 yuan on Friday evening.
Steel futures are also under pressure with rebar and hot-rolled coil prices sitting at 3,575 and 3,397 yuan respectively, off Friday’s night session close of 3,627 and 3,465 yuan.
($1 = 6.9499 Chinese yuan)
Recommendation
We should go long, we are expecting to see the price decline due to the rise of iron ore production. Indeed, according to the Fitch Solutions Global Iron Ore Supply and Demand Outlook Report, the iron ore’s output will increase from Brazil and India from 2018 to 2027. Thanks to their new mining infrastructure.
References
Els, F. (2018). Iron ore price craters 8% | MINING.com. [online] MINING.com. Available at: http://www.mining.com/iron-ore-price-craters-8/ [Accessed 28 Nov. 2018].
Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Contracts – Investing.com. [online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-contracts [Accessed 28 Nov. 2018].
Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Contracts – Investing.com. [online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-contracts [Accessed 28 Nov. 2018].
Lme.com. (2018). London Metal Exchange: LME Steel Scrap. [online] Available at: https://www.lme.com/Metals/Ferrous/Steel-Scrap#tabIndex=2 [Accessed 28 Nov. 2018].
MINING.com. (2018). China iron ore hits 4-1/2-month low, steel market under pressure | MINING.com. [online] Available at: http://www.mining.com/web/china-iron-ore-hits-4-1-2-month-low-steel-market-pressure/ [Accessed 28 Nov. 2018].
Scutt, D. (2018). Iron ore is in free-fall. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/iron-ore-price-collapse-china-steel-production-profits-2018-11 [Accessed 28 Nov. 2018].