Iron ore 2013: Big China demand surprise, seaborne supply strong
The defining issue for iron ore in 2013 was the upside surprise to Chinese steel consumption. While GDP growth slowed and credit growth retraced in the second half of the year, steel production growth managed to remain very strong, without leading to an alarming increase in inventory. Full year growth of 7.5%YoY was miles above expectations seen even at mid-2013.
Raw material restocking also played a role in supporting prices. Inventories were low for much of 2013 and have only now been ramped to more normal levels. While port stocks are in the "normal" range in terms of current consumption, they are not particularly high given the normal seasonal ramp up in production into mid-2014.
Supply growth was strong, although this was not unexpected given planned capacity increases in Australia. India fell YoY to ~14mt, although this run rate was seen in the later stages of 2012. Brazil managed small gains after improving in the second half.
Within Australia, BHP Billiton and Fortescue drove the bulk of the gains and they are expected to add similar tonnages again in 2014. Rio tinto is also expected to grow at a fast rate than it did in 2013, adding ~25mt.
Supply growth was particularly strong in Q3 as Brazilian exports made up ground from a weaker first half, while expansions at BHP and Fortescue rolled through from strong growth in Q2.
This surge in supply, however, did not sink prices, because the bid from China for both stocking and consumption demand was so much stronger than expected.
It was stronger iron ore supply and the healthy bid from China that contributed to a big spike in freight in September, with the Baltic Dry Index more than doubling. Stronger coal demand helped pushed the BDI higher again into December.
Bulk freight has now pretty much unwound the gains seen at the end of 2013. Some of this is seasonal as weather disruptions usually tame iron ore and coal exports. But its also because demand has softened, with coal prices easing on higher stocks and iron ore interest drifting into Chinese New Year.
2014: low demand growth + more supply, significant price wobbles
Chinese crude steel production growth has started on a cooler note at the start of 2014, growing ~3.5%YoY in the first 20 days of the month. This is by no means disastrous, but is weaker than growth seen in 2H13.
Inventories of iron ore and steel are not particular high through the supply chain and are at this stage fairly neutral to the outlook.
Seaborne supply growth will be stronger again in 2014 and are estimated to rise by ~100-120mt.
Prices should be weaker, on average through the year and this is partially to do with lack of restocking demand boosting demand and prices like it did in 2013.
More importantly, despite decent seaborne supply growth in 2013, very strong demand has meant there hasn't been any displacement of high cost production in China in the last 12 months.
While some of this high cost supply will be competed away in 2014 by seaborne market supplies, its unlikely that all high cost suppliers will be pushed out entirely for the entire year even if demand growth is much more moderate.
That said, the process of displacing some high cost supply is not going to be smooth. Over short periods, price signals in commodity markets tends to incentivise all production at the same points on the cost curve or none of it.
Furthermore there are significant risks to the demand profile from tightening in the last 3 months. This too may cause consumption to fade in and out through the year.
So it seems likely that prices will be more up and down through the year, with the stability in 2H13 giving way to much more trading opportunities.
Right now its probably worth being short, but this won't be a set and forget trade for the rest of the year.
