By Brazil Stock Guide — Iron ore prices have strengthened in recent weeks, but underlying fundamentals in China remain fragile, with steel demand still weak, production subdued and port inventories elevated, according to a report by XP released this week.
Iron ore has gained about 7% since August, supported by seasonal restocking ahead of Chinese holidays, higher freight costs and the unwinding of positions that had favored coking coal over iron ore. XP, however, said the recent price recovery does not point to a structurally tighter market.
China’s apparent steel demand fell 3% year over year in August, an improvement from the 6% decline recorded in July. Production also remained weak: data from the China Iron and Steel Association, or CISA, showed crude steel output down 7% from a year earlier, while official figures pointed to a 4% decline.
Pig iron production also fell, while iron ore inventories at Chinese ports remained elevated, standing 19% above year-earlier levels. China’s iron ore imports rose 3% in August from a year earlier and were broadly unchanged from the previous month.
Steel exports, meanwhile, continued to provide an important offset to weak domestic demand. Chinese shipments rose 7% year over year in August, accelerating from a 3% increase in July.
China’s property sector remains another source of pressure. Floor space sold fell 13.4% year over year in August, while new home starts dropped 27.8% in July. XP said domestic demand remains weak despite the resilience of Chinese exports.
On the supply side, seaborne shipments are expected to increase seasonally over the coming months, which should keep iron ore availability relatively comfortable. XP also cited reports that state-backed China Mineral Resources Group had asked some steelmakers to temporarily refrain from negotiating purchases of Rio Tinto’s Pilbara Blend amid ongoing contract talks.
Higher logistics costs, however, are providing some support to prices. Freight rates on the Tubarão-to-Qingdao route have risen about 25% since August, against a backdrop of higher oil and coal prices, reducing the competitiveness of higher-cost seaborne producers.
In Brazil, iron ore exports fell 7% year over year in August. Shipments through Ponta da Madeira declined 10%, while volumes through Itaguaí fell 11%. Exports through Tubarão were broadly flat from a year earlier.
Despite the recent rebound in prices, XP said the iron ore market remains broadly balanced rather than tight, with weak Chinese demand and the prospect of higher supply limiting the scope for a stronger near-term rally.
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