LAUNCESTON, Australia, Sept 29 (Reuters) – Iron ore heads into a week-long Chinese holiday hiatus with prices elevated and mixed signals as to the strength of demand in the world’s largest importer of the steel-making raw material.
Iron ore futures traded in Singapore SZZFc1 ended at $120.77 a metric ton on Thursday, up slightly from the prior close of $120.67.
The price has eased slightly from the recent peak of $123.37 a metric ton on Sept. 15, but remains 17% above the low of $103.21 hit on Aug. 3.
The price action has been mirrored in domestic contracts traded on the Dalian Commodity Exchange DCIOcv1, which ended at 851.5 yuan ($116.64) a metric ton on Thursday, up slightly from the previous close of 844.5 yuan.
Dalian futures are down from the Sept. 15 peak of 873 per metric ton, but up 18.6% from the recent low of 718 yuan on Aug. 9.
The recent rally has been driven by the fundamentals of strong imports and lower port inventories, as well as a lift in sentiment from some signs of recovery in the key housing sector, such as rising new bank loans.
Countering the optimism is a likely easing of imports in September, the possibility of official action to limit steel production in the fourth quarter and the ongoing woes of some property developers.
China Evergrande Group 3333.HK is facing action by offshore creditors to liquidate the cash-strapped major property developer, which is trying to restructure offshore debt worth $31.7 billion.
The concerns in the residential property sector threatens to cast a pall over China’s economic recovery, and over the iron ore and steel sectors given that it accounts for about a third of domestic steel demand.
IMPORTS MODERATE
It’s also likely that China’s imports of iron ore will have taken a breather in September after a robust outcome in August.
Imports are likely to be around 96.6 million metric tons in September, according to commodity analysts Kpler, while LSEG data is estimating arrivals of 96.4 million.
This would be down from the customs figure of 106.42 million metric tons in August, which was the highest so far in 2023 and the most since October 2020.
It’s also worth noting that imports have a strong track record of being lower in October than in September, given the influence of China’s annual week-long National Day holidays.
Imports in October were lower than in September in every year going back to 1999, according to official customs data.
The X-factor for China’s iron ore imports and steel production in the next few months is what will officials tell steelmakers.
If the authorities in Beijing aim to ensure steel output in 2023 is no higher than that in 2022, it implies production will have to be lower in the last four months of the year than it was in the first eight.
Crude steel output was 712.9 million metric tons in the first eight months of the year, according to official data, giving a monthly average of 89.1 million.
Total production in 2022 was 1.01 billion metric tons, meaning that in order to keep this year’s output to the same level, a total of 297.1 million can be made in the last four months.
This equates to 74.3 million metric tons a month for the September to December period, a sharp reduction in the monthly average output so far this year.
However, there is no guarantee that Beijing will enforce a cap on steel output, as the authorities may decide to allow production to continue at high levels in order to boost economic growth and allow for increased exports of steel products.
On the positive side for iron ore sentiment is the weak state of port inventories, with data from consultants SteelHome SH-TOT-IRONINV showing these dropped to 110.65 million metric tons in the week to Sept. 22, the lowest since July 2020 and below the 137.8 million from the same week in 2022.
This implies that there is scope for imports to rise in order to replenish inventories, although the current high prices may be deterring traders from arranging cargoes.
Overall, there are more factors likely to weigh on iron ore prices than provide support, with the key variable being what will happen to China’s steel production in the fourth quarter.
The opinions expressed here are those of the author, a columnist for Reuters.
GRAPHIC-China iron ore imports vs SGX price: https://tmsnrt.rs/3RCeUOo
(Editing by Miral Fahmy)
