Metals Update: Iron Ore

Iron ore has been a volatile space so far this year and has moved from feeling fairly bearish to rather bullish in sentiment recently. Iron ore has been generally more bearish over the last couple of months on the back of weaker physical, led by a poor housing market in China, (lack of building new properties and construction companies faltering), steel mill margins being squeezed and iron ore inventories building at both mill and port level. However, iron ore cannot ignore macro news and China continues to ‘drip feed’ in news of further stimulus which continues to ignite the price of iron ore, despite fundamentally not much changing from earlier in the year.

Since the start of April, we have seen the active SGX contract (May) pick up from around $96.00 to recent highs of $117.50 – most recently this week, the NDRC stated that they will issue special types of bonds (c.USD540m), some of which will be used to aid domestic steel consumption. Local China Governments have also recently pledged support to new property projects whilst trying to streamline and come up with targeted solutions for existing housing projects. Despite being in peak steel demand season, (which has been relatively sluggish thus far), we have witnessed a slight turnaround in the physical market this week with both mills and traders more willing to pick up cargo, (a more bullish sign for futures both on flat-price and spreads) – PBF premiums have seen an uptick over the last week and discounts for lower grade cargoes MACF look to be narrowing in the short term also.

By Lewis Parfitt, Broker, Derivatives