Iron ore prices stretched gains for the second consecutive week with 63% grade Indian fines being traded at $183/MT CFR. Supply from India continues to be scarce owing to the monsoon and restricted mining operations. The Indian ore stock pile at the major Chinese ports kept declining since the beginning of July. The price hike is despite the fact that major ore producers in Australia and Brazil have posted a higher second quarter production volume and sales volume for iron ore. For the Australian suppliers, the first quarter was marred with heavy supply interruptions due to natural calamities. The rails lines and few ports in Australia are yet to be back in full swing after the heavy damage caused due to the floods. Rio Tinto, Australia’s largest producer posted an output of 48.9 million MT iron ore, which is a 17% percentage increase in production compared to the first quarter.
The Chinese market is still pessimistic about the strength in iron ore prices. The Chinese steel mills and traders strongly believe that the recent price hike will be short lived and that the ore price will come down sharply. As per the data available from Chinese steel association, the profit margin for steel makers was only 2.9% for the 1st half of the year, which is far below the average profit margin of 6% across the industries in china. This reduction in profit margin is attributed to the iron ore price hike. As the country is headed for the traditional off season, the steel mills do not expect much demand for the finished products and hence expect the raw material price to correct strongly so as to have a better cushion with the profit margin. In spite of the lack of confidence for current season steel demand, as on June, the Chinese crude steel output and steel product output posted a y-o-y increase, indicating a sustained growth in the steel demand both domestic and overseas.
The Indian domestic supply of iron ores is also affected largely. Many sponge iron plants at various locations are at the verge of closure due to non availability of material. The local sponge iron plants near Karnataka are facing an acute shortage of iron ore supply as the supply from Karnataka is still in a closed state. The Supreme Court’s refusal to interfere in the Karnataka government’s decision to frame rules to curb illegal mining will further delay the availability of material from this region.
The freight market did not have any momentum as the BDI closed negatively for the last four sessions. Along with the smaller vessels, the capsize vessel rates also showed weakness with many vessels being idle for the last week. The weakness in bulk freight rate is expected to continue for the coming week unless a more than expected hike happens in the iron ore prices. The iron ores prices are expected to be stable for the coming week with CFR prices for 63% grade Indian iron ore prices in the range of $183 to $185 range. The supply from India will continue to be tight for the further couple of weeks.
