Iron Ore Price Rally Gets a Boost from China's January Imports

Launceston (Australia):  The Iron ore market has seen a remarkable surge in price this year, due in large part to the re-opening of the Chinese economy after it abandoned its strict zero-COVID policy. While other commodities such as crude oil and copper have also gained from the China recovery narrative, Iron ore's rally appears to be specifically driven by an actual increase in demand.

At the end of January 2021, the spot price of benchmark 62% Iron ore reported by Argus was $126 per tonne - up 7.1% from the beginning of the year and 59.5% since its low last October ($79 per tonne). Surprisingly, this jump doesn't appear to correlate with imports by China, which represents 70% of global seaborne trade.

China imported 90.86 million tonnes of Iron ore in December, down from 98.85 million tonnes in November and lower than October's 94.98 million tonnes. Despite being a historically soft month for imports, the result still came in at 5.6% above what was seen in December 2021.

According to vessel-tracking and port data compiled by commodity, January's Iron ore imports look much stronger. China is expected to import 115.6 million tonnes in this month. However, the figures from the commodity may not align with official customs numbers due to variations in when cargoes are considered cleared.

The seaborne figures do not consider the small amounts of overland Iron ore imported from Russia and Mongolia. January’s estimates, however, suggest an extremely strong month for China - possibly even surpassing the record-breaking 112.65 million tonnes imported in July 2020.

An official reading on imports may not be available until March, since China customs usually combines the first two months of the year in recent years to avoid volatility due to the changing dates of the Lunar New Year. The increasing spot price of Iron ore has caused some concern in Beijing, with the state planner releasing its third warning against excessive speculation last week.

The National Development and Reform Commission has so far only issued verbal warnings. However, if the main domestic contract on the Dalian Commodity Exchange continues to rise, the risk of higher margins for futures contracts and other actions increases. On Jan. 13, the front-month contract reached an all-time high of 896.50 yuan ($132.23) per tonne, but it has since gone down slightly to close at 856.60 yuan on Jan. 20.

While there are various measures the authorities can take to control prices, past experiences suggest that they will only provide short-term relief if market demand remains strong. The supply side is unlikely to offer any respite, with shipments from Australia set to increase marginally and those from Brazil expected to stay largely unchanged in 2023.

Evidence of growing steel output and demand in China are necessary to keep positive sentiment on Iron ore prices going. In December, its steel production rose 4.5% to 77.89 million tonnes compared to the prior month, yet annual output stood at 1.10 billion tonnes, 2.1% lower than 2021's record high.

It appears that Iron ore prices and imports are outpacing the inevitable rise in demand for steel associated with increased housing construction and infrastructure development in China this year.