China mill stocking lifts seaborne iron ore prices

China's seaborne iron ore prices have risen since December, despite a sluggish steel market, as mills and traders stock up on February and March delivery cargoes in anticipation of a demand turnaround in the spring.

Steel and iron ore prices typically move in tandem, as mills tend to slow ore purchases in a weak steel market. Iron ore prices fell sharply in November, in line with trends in steel markets, as profit margins at mills fell to 100-400 yuan/t ($15-60/t) by the end of November from around Yn800-1,000/t in early-November.

But iron ore prices have risen in December and January, despite steel prices continuing to decline. The Argus-assessed, yuan-denominated ex-warehouse Shanghai rebar price has fallen by 5.5pc since 3 December, while the hot-rolled coil price has slipped by 1.6pc. But the Argus ICX 62pc seaborne fines price has risen by 12pc since 3 December to $74.55/dry metric tonne yesterday.

Steel mills typically start building stocks of ore in December and January for the seven-day lunar new year holiday, which starts in early February this year, and the spring season that gets underway in late February. But low profit margins may have deterred mill restocking. Profits at Chinese steel mills fell by over 25pc in November and profit margins are back at around November levels.

But steel mills have become more enthusiastic about the steel market outlooks, despite current low profits, largely because of government measures to stimulate the economy such as by reducing mandatory cash holdings for banks, announcing large new railway projects, implementing corporate tax cuts and raising provincial spending.

Beijing has indicated more measures to revive the economy are likely to be implemented this year. And the Chinese government is not expected to allow a hard landing in the real estate sector in the current fragile economy, and could ease restrictions on new home purchases to boost real estate investments and start new commercial projects.

Argus reported trades for 39 spot seaborne iron ore cargoes in the first 10 days of 2019, compared with 17 in the same period last year. A total of 58 cargoes were traded in January 2018.

There were 55 cargoes traded in December 2018 compared with 49 a year earlier.

Demand for iron ore has picked up this month as mills buy more, said a trader with a major international trading firm. Demand is focused on medium and low-grade fines, the trader said.

"Steel mills are restocking now and we have already bought some cargoes of PB fines, BRBF fines and low grade fines. Northern China-based mills will continue to buy some portside resources, while seaborne cargo replenishment has almost finished," said the manager of a south China-based mill.

Buying interest has also been robust for Jimblebar fines and Newman fines, although demand has been sluggish for higher-priced mainstream lump, pellet and high-grade fines.

Mining companies are also offering more cargoes in the market as they look to cash in on the spike in demand ahead of the lunar new year holidays, said a Singapore-based trader.

The pace of seaborne deals picked up in the second half of January 2018, which could indicate the current pace of restocking may continue until the end of this month. But some market participants said buying interest is shifting to the portside markets.

"We are now more focused on portside cargoes, and have interest in buying lump, SSF fines and Fortescue blended fines at the ports now," said the manager of a Tangshan-based mill. More restocking at ports may also lift seaborne prices by boosting overall iron ore market sentiment.

"I bet there will be more restocking before the lunar new year holiday starts. Downside risk for prices is quite marginal in the near term," said an east China-based trader.