Iron ore prices hit new record

The price for iron ore surged to a record US$237.57 per tonne on May 12 as strong Chinese demand continued to outpace supply.

The record price levels are supported by a continued supply squeeze, with major iron ore producers reporting seasonally lower output in the March quarter, and growing concern over the escalating Covid-19 crisis in India, which could impact the country’s exports of the metal.

“These factors, along with a recovery in ex-China demand, is expected to drive the global seaborne trade balance into a deeper deficit in 2021, with annual prices forecast to average US$153 per tonne,” Ronnie Cecil, principal analyst for metals and mining research at S&P Global Market Intelligence, tells The Northern Miner, although he notes a seasonal rise in Brazilian exports are likely to lower prices in the second half of the year.

CRU Group principal analyst Erik Hedborg attributes the record price run in part to recent production cuts in the city of Tangshan in China’s northeastern Hebei province, which he says have boosted demand for higher quality ore. It has also prompted mills to build iron ore inventories as their margins are on the rise.

“Iron ore producers are enjoying exceptionally high margins as well; around two-thirds of seaborne supply only require prices of US$50 per dry metric tonne to break even,” Hedborg states in a May 6 research note to clients.

So bullish is Raymond James analyst Brian MacArthur that he has increased the brokerage’s 2021 calendar price for premium iron ore with an iron content of 65% and higher to US$148 per tonne from US$138 per tonne previously.

“Premium iron ore prices remain strong and averaged about US$210 per tonne in April. In our view, the recent prices reflect ongoing strong demand supported by commitments to reduce emissions from steelmaking,” MacArthur commented in a research note to clients on May 7.

In addition, first-quarter production reported by major producers that were in-line or lower-than-expected, highlight the supply challenges the industry is facing to meet demand. With a possible global economic recovery and a positive outlook for domestic growth in China, the near-term outlook for global steel production appears positive.

“While iron ore supply is expected to increase over the remainder of 2021, we believe that increase should be generally absorbed by the strong demand, and hence, we have increased our 2021 calendar Fe 65 price forecast,” writes MacArthur.

In BMO’s latest Steel Monitor, analyst David Gagliano notes that spot prices for U.S. hot-rolled coil steel have climbed to yet another all-time high, reaching about US$1.50 per short ton on May 10, a 5% increase over the past two weeks.

Although the current supply squeeze is expected to ease with increasing domestic production in the U.S. and higher imports, the bank maintains its view that prices are likely to remain well above historical averages for the remainder of 2021 and 2022. This is a result of continued strong end-market demand and a staggered timeline for upcoming greenfield capacity additions, it explains.

“Our base case, which sees prices moderate in the second half of 2021, is becoming increasingly conservative, given most domestic U.S. capacity is now restarted or running all-out, import growth remains limited, finished steel inventories remain low, lead times remain extended, and global raw materials and finished steel prices continue to move higher,” Gagliano writes.

Gagliano’s colleague Colin Hamilton, a commodity analyst at BMO, argues in a research note that while steel demand is still robust and underpinning the recent record price runs for iron ore, the bank sees the price jump fuelled by a concern by mills in China that bank funding for Australian iron ore may be harder to come by in the months ahead, given the current geopolitical tension between the countries.

“With Bloomberg reporting that China has asked LNG purchasers to stop buying new Australian cargoes, this will further stoke fears of restrictions,” Hamilton commented in a May 10 research note. “However, given the importance of this trade flow to both countries, we do not think an iron ore ban is likely or practical.”

Moody’s Investors Service says the lofty iron ore prices will likely recede but remain strong amid persistent supply constraints.

“High iron ore prices in early 2021 are unsustainable, but market fundamentals remain strong for 2021 based on supply constraints and a lack of major expansion projects in store for the coming years,” Moody’s senior VP Barbara Mattos says in an interview. “Rising steel demand will sustain iron ore prices at or above the higher end of our US$70-US$100 per tonne price sensitivity.”

In particular, capacity constraints will keep Vale‘s (NYSE: VALE) 2021 iron ore production to 315 million-330 million tonnes, more than its annual 300 million tonnes in both 2019 and 2020, but far less than its 380 million tonnes in 2018, according to Mattos.

Meanwhile, most iron ore producers are directing investments toward maintaining current production volumes. BHP (NYSE: BHP; LSE: BHP; ASX: BHP), Rio Tinto (NYSE: RIO; LSE: RIO; ASX: RIO), Vale and Fortescue Metals Group (ASX: FMG) together control more than 70% of the global seaborne iron ore market, and all are focused on supply discipline, increasing environmental, social and governance risks and requirements for new projects.

Mattos says she expects high prices will continue to support strong cash flow for the primary producers, at least for the time being, with some of them posting all-time high free cash flow and earnings before interest, taxes, depreciation and amortization (EBITDA).

Last year, iron ore prices rallied to nearly US$180 per tonne, reflecting 5.2% year-on-year growth in Chinese steel production in addition to supply disruptions, particularly for Vale, and lower inventories at points throughout the year. But once production capacity recovers sometime in 2022 and scrap becomes more readily available, Mattos expects iron ore prices to decline toward marginal production costs of US$60-US$70 per tonne.

The World Steel Association expects global steel demand to grow by 4.1% this year — rising by 2.5% in Asia, 11% in the EU and 6.7% in North America. China will remain the key driver for iron ore demand. Over time, however, a structural shift toward electric arc furnace steel production and away from emissions-generating blast furnaces would cut iron ore demand growth or shift demand toward higher-quality ore for Chinese consumption.

The analysts point out that steelmakers are increasingly looking to secure premium-grade iron ore as they battle to reduce carbon emissions, especially in China. The steelmaking industry accounts by far for the most carbon emissions of any other industry.

Canada-focused Champion Iron (TSX: CIA) says it is capitalising on the global pivot to using premium-grade iron ore to make steel. During the pandemic, it has been investing to double output by mid-2022 from its cornerstone Bloom Lake asset in Quebec. It currently produces about 8 million tonnes a year.

The company, which operates in the Labrador Trough, a 1,600 km-long and 160 km-wide geologic belt of high-grade iron ore deposits suitable for direct shipping to end-users and extending south-southeast from Ungava Bay through Quebec and Labrador, also recently closed the acquisition of the nearby Kami development project.

The feasibility study stage Kami project has long been seen as the next likely Canadian iron ore project to make it through to production.

Michael Marcotte, Champion Iron’s VP for investor relations, says the company does not believe established producers elsewhere in the world will be able to fully meet the rising demand for high-grade iron ore. Any incremental production from places like Brazil and Australia, it believes, will be met with infrastructure constraints hindering product from reaching seaborne markets.

“In contrast, Kami sits right off our existing railway infrastructure to the Port of Sept-Îles on the St. Lawrence seaway, and the beautiful piece to this is the Canadian federal and Quebec governments have been investing heavily in infrastructure expansions over the past decade to prepare for the emergence of a potential new supercycle, unlike the other main sources of iron ore have done,” he says in an interview.

“Quebec is actually infrastructure rich. There’s ample capacity for us to bring on our phase-two expansion (of Bloom Lake), but also for us to consider additional growth opportunities like Kami.”

Champion is moving swiftly to update a feasibility study released by the project’s former owner Alderon Iron Ore, in September 2018. That study was calculated at an assumed cost-and-freight selling price of US$89.67 per tonne, resulting in a pre-tax net present value (at an 8% discount rate) of US$1.7 billion and an internal rate of return of 24.6%, given the pre-production capital requirement of about US$982.4 million.

“We feel the demand for high-grade iron ore is going to be accelerating and the market will require the stability of the region because a lot of the steel majors have growing concerns about relying almost exclusively on Brazil for premium iron ore,” Marcotte says. “Quebec offers a very attractive opportunity for steelmakers globally to have reliable access to premium material, especially to have a partner in Champion that has a very strong ESG track record.”