Iron ore crash continues

Iron ore prices finished the week at just under $92/t on a CFR China basis this week, which is not too far away from the lows seen in September 2012.

The degree of weakness at this point is a bit of a surprise, given from a seasonal perspective steel consumption is at its strongest.

This year it has been more difficult to gauge how strong activity actually is thanks to changes to the data.  The official NBS data appears to have revised last year higher, but growth rates are relatively slow.

This has affected the CISA intra-month data, which is now only published CISA mills.

Activity at these mills is pretty good in contrast to the declines in growth we saw during Aug/Sep in 2012 that led to the iron ore price crash back then. In the month to May 20, CISA mill production was up a little under 4%YoY.

Inventories at CISA mills are a bit higher than normal, although not to the same degree as in earlier in the year.  When accounting for inventory at steel traders, the inventory picture for steel is not particularly bad.

Inventories for iron ore are also not overwhelmingly negative.  Port inventories have been rising on an absolute basis, but are not dramatically high compared to current consumption rates.

When looking at the total inventory chain for small mills, iron ore inventories are at a relatively low level, at least compared to recent history.  Indeed its this destock through the supply chain that has contributed to price weakness, although there has been more destocking at mills of domestic ore than there has been at ports.

Iron ore exports have been enormous in the YTD, with shipments from Australia and Brazil rising almost 20%YoY. But looking at the data as of right now, this additional supply

What is probably driving prices to be weaker earlier in the seasonal cycle is two factors.  First is that while overall inventories are low, from a compositional perspective there is still a lot of liquid inventory sitting at ports.

Second is that while steel consumption rates are probably a bit better now than expected maybe a month or two ago, the outlook still looks pretty concerning, particularly for housing construction.

So things still look problematic for iron ore, even at these low levels.  Liquid inventories at ports have yet to be drawn, while supply should be stronger even if just from the seasonal lift in Brazilian exports.  Steel consumption rates are very likely to slow, even if they have been stronger than anticipated.

Perhaps some of weakness in prices this week is overdone purely on the immediate market fundamentals.  But there is still plenty to be concerned about in the coming months, the bounce in prices seen following the drop in 2012 looks much less likely this time around.