Price Movement
As we can remark on this graph, after the previous falling price to 62,99 USD per Metric tonne on the 27th of November, we see an upward trend earlier this month. However, the slight drop on the start of this week indicates a current price at 66,82 USD /metric tonne especially due to the weakness in Chinese steel Futures Contracts.
Small decreases are present for the Lower and Higer grades of Iron Ore. The price of the iron ore fines 58% is fix at 42 USD/Mt and the 65% fines at 82,80 USD/Mt.
Supply and demand
Chinese steel production is still slowing due to the trade war with the US and also because China took measures to reduce air pollution. For instance, the city of Tangshan – China’s top steel production hub – announced on the December 8th, second-levels smog alerts which has led to an even more severe decline in steel production.
Therefore, 86.25million tonnes of iron ore was imported in December, down 2.4% from October and 8.8% from the same month a year earlier.
So far this year, China has imported 977.89 million tonnes of iron ore, down slightly from 991.26 million tonnes in the same period the previous year, according to calculations from Reuters (global news agency in London).
As a consequence, steel mills in the smog-prone city have to shut their sintering capacity by 30-60% or even shut down based on their emission level.
Deep future curve
The reason is the weakness in Chinese steel futures contract leading a decrease in futures contract number of iron ore.
Moreover, it is predicted that the iron ore supply will increase thanks to new investment in Brazil for the iron ore exploitation and cost decreasing by 5 %.
The Singapore Exchange (SGX) launched on the 3rd December the world’s first high-grade iron ore derivatives in order to answer the Chinese demand and to be in line with the new context of China’s environmental policy. Indeed, the new swaps and futures reference the 65% Fe Brazilian fines index, CFR Qingdao to manage high-grade segment exposure, with grade differentials in iron ore more volatile amid strong mills’ margins and the Chinese government’s targets to reduce emissions.
For instance, the top larger iron ore producers Vale is negotiating changes in its iron ore pellet contracts for 2019 from its current 62% Fe to the 65% Fe.
Recommendation
We should go long, we are expecting to see the price decline due to the rise of iron ore production.