Iron ore rallies on Australia supply fears, Chinese demand hopes

Iron ore is enjoying a rally based largely on two factors that have yet to materialize, a renewed construction boom in China and possible supply disruptions at Australia’s top exporter.

The spot price of iron ore for delivery in northern China, as assessed by commodity pricing agency Argus, ended at $137.60 a ton on Wednesday, a up 58% since the 18-month low of $87 in mid-November.

The catalysts for the rally are indeed fear and hope, and together they prove to be enough to give the steel commodity a bullish tone.

The fear is that Australia’s supply could be affected by the variant of the Omicron coronavirus which breaches the walls of the fortress state of Western Australia, which was until now one of the few jurisdictions in the world to keep COVID-19 at bay using strict border controls.

Western Australia is home to the bulk of Australia’s iron ore mines, which in turn supply around 70% of imports from China, the world’s biggest buyer of raw materials.

The state recorded 24 new cases of COVID-19 on Wednesday, and while that seems like a tiny number compared to the 17,316 new cases and 29 deaths recorded in the state of New South Wales on the same day, the concern is that Western Australia is at the start of an Omicron wave.

“We now have an epidemic and we will not be able to control it,” Western Australia Premier Mark McGowan said on Wednesday.

Despite this pessimism, McGowan still keeps his state’s borders closed in an effort to control the rate of spread of Omicron, but it could also lead to a drop in iron ore production.

Many remote mine workers reside in other states and large miners fear some will give up their jobs unless Western Australia’s border controls are relaxed, allowing them to travel freely between the mines and their homes in the eastern states of Australia.

Rio Tinto RIO.AX, BHP Group BHP.AX and Fortescue Metals Group FMG.AX, Australia’s largest iron ore miners, all reported likely labor disruptions to their operations.

Another concern for iron ore production in Australia is the upcoming hurricane season, which could be more severe than usual due to the La Nina weather phenomenon, which has in the past brought more and stronger storms.

STABLE EXPORT VOLUMES
The potential disruptions are just that, with actual export volumes holding up.

Australian iron ore exports are estimated by Refinitiv at 74.13 million tonnes in January, up from 80.26 million in December, but above 68.25 million in November and 71.71 million in October.

Strong exports in recent months showed in China’s import figures, with Refinitiv predicting January imports at 117.41 million tonnes, which, if confirmed by official customs data, would be the highest never recorded, eclipsing the official 112.65 million in July 2020.

Commodity consultants Kpler also expect record iron ore imports from China in January, with their data indicating arrivals of 117.42 million tonnes. Official data will likely show some difference as not all shipments that are unloaded in January can be assessed as cleared in that month.

Robust iron ore imports from China are the hope for the current recovery, with expectations for strong construction activity in the months ahead.

Steel production in China could be limited until March, given the drive to limit pollution during the Beijing Winter Olympics and the week-long Lunar New Year holiday ahead.

However, once this period is over, demand for steel is expected to increase as construction ramps up to the summer peak and Beijing strives to stimulate the economy to meet its growth goals.
Source: Reuters (edited by Richard Pullin)

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