By Ulf Bergman
Last month, the front-month iron ore futures listed on the SGX recorded their first monthly decline since February. Despite a rally in early May, which pushed the contracts to a shade below 112 dollars per tonne mid-month, the futures gave up those gains and more to close the month in the red amid a shift in sentiment. At the same time, seaborne export volumes of iron ore recorded month-on-month growth for a third consecutive month.
Iron Ore Prices Under Pressure
The SGX June futures ended last month just above 105 dollars per tonne, slightly more than a dollar below April’s close. However, the modest monthly decline masked a reasonably eventful month for the contracts. The first two weeks of the month saw the contracts extend the price rally that began in mid-February, delivering a gain of nearly eighteen per cent over three months.
The three-month rally was largely sentiment-driven, as the macroeconomic outlook was clouded by mounting growth concerns. Still, demand from Chinese steel mills, amid inventory restocking and increased pig iron production, provided some support to the iron ore market. The reversal during the second half of May has been driven by robust supplies and concerns over Chinese steel production, amid higher metallurgical coal prices following last month’s deadly mine accident in China’s Shanxi province.
The new month has not brought a change in sentiment. The July futures have fallen by around three per cent since the beginning of June, as abundant supplies and seasonally softer demand from Chinese steel mills have weighed on prices. At the same time, Chinese steel rebar prices have retreated after a brief rally at the end of May, fuelling further concerns over steel production and iron ore demand amid shrinking profit margins.
Positive Momentum for Seaborne Iron Ore Volumes
Global monthly seaborne iron ore exports continued to rise after a dip at the beginning of the year. According to Signal Ocean data, the aggregate for May rose by 3.5 per cent from April, nearly reaching 149 million tonnes. However, despite the growth, last month's total fell short of the 151 million tonnes recorded in the same month last year.
Among the world’s major iron ore exporters, Australia stood out last month, with seaborne exports up both month on month and year on year. Month on month, growth reached seven per cent, while year on year it was a more modest three per cent. For Brazil, following strong growth in April, volumes stabilised in May. In contrast, shipments from the rest of the world offset the growth in Australian exports.
Among exporters in the rest of the world, developments in Guinea were especially notable last month. While still relatively insignificant in terms of global market share, Guinea's export growth showed considerable strength, with volumes doubling for a second consecutive month. As expected, most of the iron ore from the West African country was destined for China. The expansion is expected to follow a similar trajectory over the coming months as operations at Simandou continue to ramp up.
The Outlook for Seaborne Volumes and Iron Ore Prices
Seasonal patterns suggest that iron ore shipments will extend the recent upward trajectory, before taking a breather in July as summer holidays in the Northern Hemisphere take effect. In recent years, the month-on-month growth between May and June has ranged between three and six per cent, with both dominant exporters normally exporting more. This year, the continued acceleration in Guinea's output will add to the global supply of iron ore, especially if recent months’ growth rates are maintained.
Global macroeconomic headwinds, pressure on Chinese steel demand and high inventories will maintain the recent pressure on iron ore prices. Combined with the likely seasonal increase in export shipments, the remainder of the gains from the recent price rally may be under threat during the coming month.
While developments over the coming month may be bad news for iron ore traders and miners, capesize owners have cause for cautious optimism. Normal seasonal growth in seaborne iron ore volumes should provide additional support for freight rates, with month-on-month growth typically in the three-to-six per cent range for the May-to-June period in recent years. This year, the continued acceleration in Guinea's output adds a structural layer on top of the seasonal pattern. If exports from Simandou continue to expand at recent months' rates, an additional one to two million tonnes could be added to the seasonal uptick, lifting month-on-month growth from the 3.4 per cent recorded last year towards the middle of the four-to-five per cent range.
One important caveat to bear in mind is the African rainy season, which lasts from May to October and can disrupt mining operations and logistics at Simandou, potentially moderating the export growth seen in recent months. That said, the tonne-mile impact of Guinea's contribution to the iron ore trade, given China’s importance, is disproportionate to the increase in volume. The voyage from the country’s Atlantic coast to China is roughly three times as long as the equivalent haul from Port Hedland, implying that iron ore exported from Guinea generates significantly more tonne-mile demand than if it were shipped from Australia. Hence, even a modest ramp-up in Simandou production in the coming month carries outsized freight implications for the capesize segment.
Data source: Ocean Analytics