Iron Ore Outlook Dims: China’s Falling Inventories and Steel Output Impact Market – Russell

Iron ore prices have experienced a sustained decline over the past six weeks, largely driven by ongoing issues within China’s steel sector and a plateau in port inventories of the raw material. As of August 9, iron ore futures on the Singapore Exchange settled at $101.49 per metric ton, marking a slight increase from the recent four-month low of $100.14 observed the previous day. Despite this marginal rebound, the benchmark contract has faced a consistent downward trajectory since July 5, reflecting a 29% reduction from the peak price of $143.60 per ton reached at the beginning of 2024.

This persistent drop in iron ore prices suggests a significant shift in market sentiment. Initially, there was considerable optimism that Beijing’s economic measures aimed at revitalizing the struggling construction sector would spur increased steel demand. However, this optimism has diminished as steel mills continue to grapple with profitability issues and declining sales. Recent market data corroborates this bearish outlook. For example, the benchmark Shanghai steel rebar contracts closed last week at 3,286 yuan ($458.55) per ton, marking the lowest closing price since October 2020. This represents a 20% decrease from the start of the year, underscoring the challenges facing the steel sector.

According to the China Iron and Steel Association, crude steel production at member mills averaged 1.9735 million tons per day from July 21 to 31, an 8.1% decline from the prior 10-day period. The association attributed this drop to soft steel prices. Additionally, the official data for steel production in July is expected soon, but it is unlikely to reverse the downward trend seen throughout 2024. The National Bureau of Statistics reported that crude steel output for the first half of the year totaled 530.7 million tons, a 1.1% decrease compared to the same period in 2023.

Compounding the issues, China’s steel purchasing managers’ index fell sharply to a one-year low of 42.5 points in July, significantly below the 50-point threshold that separates expansion from contraction. This drop indicates a contraction in steel sector activity and further reinforces the current negative sentiment.

While the steel sector’s struggles have put downward pressure on iron ore prices, import volumes have remained relatively robust throughout the year. Port inventories of iron ore, which had previously fallen to a seven-year low of 104.9 million tons in October, have since risen to a 27-month high of 151.8 million tons by late July. Recent data shows a slight decrease to 150.4 million tons as of August 9, suggesting that restocking efforts may be nearing completion.

In terms of import volumes, China has seen a 6.7% increase in iron ore imports, reaching 713.77 million tons in the first seven months of 2024 compared to the same period in 2023. This rise of 44.31 million tons aligns closely with the 46.9 million tons increase in port inventories since October. This indicates that while there has been significant restocking, the question remains whether there will be continued demand for additional inventory at these elevated levels.

Looking ahead, iron ore imports for August are expected to remain strong, with commodity analysts tracking 97 million tons so far, a figure likely to increase as more cargoes are assessed. July’s official import figures were 102.81 million tons, maintaining a stable range around 100 million tons for the year. However, with steel output declining and the annual import total unlikely to match last year’s 1.02 billion tons, the outlook for both iron ore import volumes and prices remains cautious.

Overall, while current data shows a strong level of imports and a significant rise in inventories, the continuing decline in steel production and prices casts a shadow over future prospects for iron ore. The market’s future will likely hinge on any potential changes in steel demand and production trends, as well as broader economic conditions affecting China’s steel and iron ore sectors.