Viewpoint: Limited relief seen for iron ore supply pain
The global 1.8bn t/yr seaborne iron ore market is expected to remain in a supply deficit in early 2021, as prices at nine-year highs have yet to bring significant new supply to the market.
A global rebound in steelmaking from the Covid-19 pandemic and China's record steel output have tightened supply across steel feedstock markets. Mainstream 62pc Fe basis iron ore prices rose to nine-year highs above $175/dry metric tonne (dmt) in December. Iron ore, which provides the biggest input for nearly 2bn t of global steelmaking, has pulled prices for steel and other feedstocks up along with it.
The iron ore shortage has been primarily driven by Brazilian mining firm Vale's slow recovery from a fatal dam accident last year. Mine closures after the accident, delays resulting from rainfall, and the coronavirus pandemic forced Vale to cut its iron ore output guidance to 300mn-305mn t in 2020 and 315mn-335mn t for 2021. Vale's target for 400mn t/yr of output, once pegged for 2021, is now achievable in 2023 at the earliest.
Vale's production is running at slightly below 1mn t/d but it will lose operational flexibility during the rainy season in early 2021, its executive director of ferrous and coal Marcello Spinelli said on 2 December. The low end of its output guidance anticipates poor weather and the high end conservatively estimates regulatory approvals for mine restarts and openings with "some upside here", he said.
Chinese iron ore traders do not see Vale's deliveries to China growing in the first quarter, expecting instead downside risks from La Nina. There is adequate spot supply of Brazilian iron ore fines, with nearly 2mn t of Brazilian Blend Fines (BRBF) and 9mn-10mn t of IOCJ fines at six major ports in north China, although scaled-back shipment outlooks have pushed up price premiums, traders said.
China's iron ore inventories fell by 5.5mn t to 122mn t over the month to mid-December, implying an annualised shortfall of 66mn t of iron ore during a record rate of steel output.
Producers of iron ore and its competing feedstocks are adding supply to chase iron ore prices at their highest levels since early 2011, but the scale required to close the gap caused by Vale's struggles may not be achievable in the short term.
Australian iron ore
Australia, the biggest seaborne supplier of iron ore at nearly 900mn t/yr, has the scale, but its turn toward supply discipline in recent years and renewed scrutiny over heritage sites are limiting any immediate upside. Producers Fortescue Metals and Roy Hill are pushing hard to maximise output, and majors BHP and Rio Tinto are on pace to meet guidance. Marginal firms are bringing production on line and mining firm Mineral Resources (MinRes) plans to grow to 92mn t/yr over 3-5 years. But most of the new capacity over the next five years is to sustain existing production and "as such, we don't see material incremental supply emerging from Australia in this period," Fortescue chief operating officer Greg Lilleyman said this month.
Non-mainstream iron ore
China doubled its imports of non-mainstream ores in 2020 from India, Russia and Chile and increased imports by more than 80pc from Russia and Canada, customs data through October show. Smaller suppliers have also seen strong gains in recent months, traders said. But these gains have been partially offset by a near halt to Indian pellet exports and a 75pc drop in Iranian imports. Europe's price premium is starting to pull Ukrainian supply, lifting import prices for concentrate and lump into China.
Chinese domestic iron ore
China's iron ore production will have limited upside because Beijing has discouraged investment in the sector with increased environmental restrictions, higher taxes and longer approval times, speakers at an iron ore conference in Xiamen said this month.
Winter will also limit output. China's unprocessed iron ore production fell by 4pc from October to 75.2mn t in November, its national bureau of statistics said. China produces more than 200mn t of iron ore concentrate on a 62pc Fe equivalent basis but estimates vary widely because of the different Fe assumptions for its run-of-mine output.
Ferrous scrap
China's anticipated restart of ferrous scrap imports in early 2021 has reminded iron ore producers that the country plans to shift toward recycling scrap under its next five-year plan and in the longer term, but that shift will be limited in 2021.
China's ferrous scrap imports ranged from 2.1mn-2.6mn t/yr in 2014-17 before the country's import ban post-2018. Only 1.34mn of scrap was imported in 2018.
China is close to self-sufficiency in terms of scrap supplies as shown by its ability to support a rise in ferrous scrap consumption to a record high of 215.93mn t in 2019 without the need for overseas purchases. Total consumption this year is on track to fall by 1pc, according to the China association of metal scrap utilisation (Camu).
Scrap imports are unlikely to eclipse the all-time high of 13.7mn t in 2009 and may not average above 20mn t over the next five years, China-based steel market participants said.
| Australia's iron ore supply and demand forecasts | ('mn t) | |||
| 2019 (actual) | 2020 | 2021 | 2022 | |
| Global iron ore trade | 1,555 | 1,647 | 1,783 | 1,861 |
| Importers | ||||
| China | 1,071 | 1,209 | 1,343 | 1,421 |
| EU 27 | 137 | 128 | 125 | 125 |
| Japan | 120 | 96 | 101 | 100 |
| South Korea | 74 | 69 | 74 | 75 |
| Exporters | ||||
| Australia | 836 | 876 | 896 | 923 |
| Brazil | 336 | 269 | 281 | 301 |
| Ukraine | 44 | 50 | 62 | 64 |
| India | 40 | 52 | 62 | 65 |
| Source: Australia Office of the Chief Economist | ||||
| Australian iron ore production | ('mn t) | |
| Producer | 2020 guidance | Update |
| Rio Tinto | 324-334 | Rio Tinto is on track to come in towards the top of its guidance for this calendar year, having shipped around 300mn t in January-November, according to initial shipping figures. |
| BHP | 276-286 | BHP produced 74mn t of iron ore from its Pilbara operations in July-September, at a run rate of 296mn t/yr, above its guidance for fiscal year to June 2021, even amid maintenance until December. |
| Fortescue | 175-180 | Fortescue expects to meet guidance for the fiscal year to June 2021. It has not guided beyond that but "clearly in this market… any opportunity to put more tonnes through the system, we're absolutely looking," Lilleyman said. |
| Roy Hill | 60mn t/yr capacity | Roy Hill is seeking approval to increase its operating rate to 65mn t/yr. It shipped around 70mn t in October ahead of it annual November maintenance slowdown. |
| Source: Company filings, Argus shipping data | ||
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