Demand for Australian iron ore remains as strong as ever, especially from China.
According to the Commonwealth Bank, citing data released by the Pilbara Ports Authority (PPA), iron ore shipments from Australia’s Port Hedland grew 7.7% to 42.1 million tonnes over the past year, setting a new record for the month of March.
Port Hedland handles iron ore shipments for BHP Billiton, Fortescue and Roy Hill Holdings. In 2017, it accounted for around 60% of Australia’s total iron ore exports.
This chart from the Commonwealth Bank reveals the steady upward trend in iron ore shipments seen over the past five years.
Helping to explain that growth — not only over the long-term but over the past 12 months — the PPA reported that shipments to China grew by 11% compared to a year earlier.
China is the end destination for around 80 to 85% of all Australian iron ore exports.
Continued demand for Australia iron ore suggests that Chinese iron ore port inventories — already sitting at the highest level on record at 161.68 million tonnes, according to data from Steelhome Consultancy — may expand even further in the months ahead should Chinese steel output not accelerate by any meaningful degree.
Vivek Dhar, Mining and Energy Commodities Analyst at the Commonwealth Bank, isn’t expecting that to take place, forecasting that Chinese steel demand will grow by just 1.5% in 2018, down from 2.5% last year, as “a resilient manufacturing sector overshadows a subdued property sector”.
“The risk to our forecast is to the downside, particularly if steel demand dips further lower from China’s property and infrastructure sectors,” he says.
And Dhar says that, in the absence of a sharp reduction in Chinese iron ore output, it could lead to further growth in iron ore inventory levels in China.
“Seaborne markets are expected to add 30-50 million tonnes of iron ore, more than enough to eclipse China’s demand growth expectations,” he says.
However, while that could contribute to further downside pressure on prices — something Dhar expects — he says movements across individual iron ore grades will likely be determined by Chinese steel mill profit margins.
“While we expect iron ore prices to trend lower to $55 a tonne by the [December quarter this year], we expect the ride to be bumpy,” he says.
“Chinese steel mill margins will remain the most important driver of short term iron ore price movements, as mills capitalise on higher margins to boost output.”
And while recent weakness in Chinese steel prices could see the price discount between lower and higher grades narrow as restrictions on steel production are relaxed as weather conditions improve, Dhar isn’t expecting the gap will return to norms seen in the past.
“We also expect a structural preference for medium grade ores [such as 62% fines will continue] as policymakers look to combat pollution and boost productivity,” he says.
“While lower steel margins will likely see lower grade ores become more attractive, we don’t expect the premium of medium grade ores over low grade ores [such as 58% fines] to return back to historical levels.”