Movement of the 62%, Fe fines iron ore Price
At the begging of the month of November the price was at 73$/Mt and started to increase till the 9th November, since than the prices is decreasing till today at the price of 74.81$/Mt
The causes:
This is due to the arrival of the winter and to the regulation from the local government of Hebei in China. Hebei is the largest steel production province.
The local government of Hebei announced an “orange” alert for smog in the air forcing the mills of steel to reduce their production until 16 November.
Steelmakers want to maximize their output of steel before winter; therefore, they need a high quality of iron ore in order to obtain the higher margin as possible. That is why the prices went up.
Since the prices of steel is decreasing, in consequence the margin is lower for the Chinese mills. Which push them to buy low grade of iron ore (58%Fe) in order to maintain their profit margin because low-grade iron ore reduce cost.
Since the announcement of “orange” alert, Chinese companies has halve their production, which decreased iron ore, 62%Fe demand.
This graph shows the basis evolution of iron ore from July 2018 to October 2018.
From the middle of July until the beginning of August, the future price is higher than the spot price, which means it is a contango, there is enough supply and lower demand. It is a normal state of the market and the signal of it is that we should store.
Then the situation changes: the spot price is higher than the future price in August, so it is slip to a backwardation which means demand is greater than supply, the market is hot, people want to buy so we should sell and do not store.
Finally, from the beginning of September until October, we can observe that the situation of the market changes again into a contango state. There is more supply than demand and we should store the iron ore.
As the whole of Chinese steelmakers companies count for 74% of the iron ore global market share, if their demand in construction or transportation sector increase, the price of the iron ore will rise also.
Recommendation
We recommend going long because today the prices for future contract are decreasing until the end of 2019, show in the table below.
Sources:
Market Index. (2018). Iron Ore. [online] Available at: https://www.marketindex.com.au/iron-ore [Accessed 15 Nov. 2018].
Investing.com. (2018). Iron ore fines 62% Fe CFR Futures Historical Prices – Investing.com. [Online] Available at: https://www.investing.com/commodities/iron-ore-62-cfr-futures- historical-data [Accessed 15 Nov. 2018].
Argusmedia.com. (2018). China’s steel profit margins accelerate falls. [online] Available at: https://www.argusmedia.com/en/news/1790676-chinas-steel-profit-margins-accelerate-falls [Accessed 15 Nov. 2018].
Scutt, D. (2018). Iron ore prices slump. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/iron-ore-prices-china-steel-demand-hebei-2018-11 [Accessed 15 Nov. 2018].
U.S. (2018). RPT-COLUMN-LME bets on new contracts to force steel industry…………………………………………………………………………………………………………………………………………… [online]
Available at: https://www.reuters.com/article/steel-pricing-ahome/rpt-column-lme-bets-on- new-contracts-to-force-steel-industry-change-andy-home-idUSL8N1XH4OV [Accessed 15 Nov. 2018].
MB, F. (2018). Iron ore pricing explained | Metal Bulletin.com. [online] Metalbulletin.com. Available at: https://www.metalbulletin.com/Article/3811904/Iron-ore-pricing-explained.html [Accessed 15 Nov. 2018].
Foundation, T. (2018). China’s Hebei province issues orange alert for smog. [online] news.trust.org. Available at: http://news.trust.org//item/20181112011729-8eqc1/ [Accessed 15 Nov. 2018].