Iron ore prices have staged their now familiar late year rebound ahead of the Lunar New Year in China in mid-January 2023, which this year is being helped by the relaxing of Covid restrictions and the start of support for the embattled property sector.
The price of 62% Fe fines delivered to northern China is up more than 15% in the past fortnight to just over $US110 a tonne and more than 30% since lows in late October of around $US76 a tonne.
But there’s no chance the price will reach the 2022 high of more than $US158 a tonne in April which helped turbocharge the earnings of major miners come midyear.
The rise has been noticed by investors who have sent the share prices of majors Rio Tinto (up more than 16%), BHP (up more 14%) and Fortescue (up more than 23%) \in the past month.
That in turn has seen a lot of media and broker chat about the comeback of iron ore and bullish outlooks for 2023.
But that will depend on what happens to the health of the Chinese economy, the pace of the relaxation of the harsh Covid restrictions and continued support for the bailout of property.
But the world’s majors are not bullish at all – in fact the two biggest, Brazil’s Vale and Rio Tinto – are being super cautious in their assessments for 2023.
Unlike BHP and Fortescue which have both forecast small increases in iron or production and exports next year, both Rio and Vale see no change from their expected 2022 performance.
Rio left its 2023 forecast steady on this year’s 320 million to 335 million and on Wednesday Vale left its forecast steady – it expects to produce between 310 million to 320 million tonnes of ore next year.
That is steady on 2021 and maybe five to 10 million tonnes ahead of the 310 million tonnes expected this year. Rio expects to produce at the lower end of its 320 – 335 million range by December 31.
That saw Vale shares slide 2% over Wednesday and Thursday which trimmed the gain in the past month to around 13%.
Vale did see production rising by 2026 (medium term) to a range of 340- 360 million tonnes – BHP’s is just over 300 million tonnes and Rio’s is similar to Vale’s at 345 to 360 million.
The bottom line though the big miners do not see much growth in demand, and production and sales gains will come from being aggressive on price, quality and costs.
Iron ore is now very much ex-growth and of all those factors, the market’s concentration will now be on cost performance by the big miners.
Rio reckons its costs will rise next year to $US21/t to $US22.5/t of iron ore, up from $US19.50/t to $US21/t expected in 2022. BHP and Rio are similar. Vale’s are $US20 to $US21 a tonne, up from $US19.50 to $US20 a tonne in 2022.
“Overall, we view the revised guidance as marginally negative for Vale … but positive for iron ore,” JP Morgan analysts said in a research note after Vale’s midweek investor briefing.
Vale executives told the New York meeting that the company will be less concerned about total volume and will focus on boosting output of high-quality iron ore (the company’s 65% Fe fines from its northern mines in Brazil) that will allow steel mills to use less energy to process it.
That in turn will see more pricing pressure on lower grade ore – product around the 55% to 58% Fe content will sell for increasing discount to the marker price index like Platts.
“We will make more money that way than by making 400 million tonnes of low-grade iron ore,” said CEO Eduardo Bartolomeo, adding that concerns about carbon emissions are leading steel processors to seek higher quality ores.
The securities filing added that Vale plans to boost capital expenditure to $6.0 billion next year from $5.5 billion in 2022, and to an annual average of $6.0-6.5 billion between 2024 and 2027.
BHP and Rio have similar spending plans, but both will be spending heavily outside iron ore and on renewables like nickel and copper.
“Much like the rest of the sector’s recent track record, Vale’s guidance update is disappointing,” RBC analysts said. “Higher costs, lower production and higher capex will all work to reduce consensus estimates”.
A day earlier Vale revealed more details of its proposed splitting of its base metals business from iron ore via a subsidiary to be 90% owned by the miner and 10% by an unknown outside group.
The new nickel, copper, gold and cobalt business will be based outside Brazil (probably in Canada) and operate mines in that country, New Caledonia and Indonesia.
…………
The cautious outlook by big iron ore companies is explained by the trend in iron ore imports into China this year – it confirms that demand for the ore is now very mature and won’t improve next year.
China dominates global demand, accounting for more than 50% of annual seaborne trade. Despite slowing demand, China’s appetite for iron ore will still drive production and ore sales by the four giants.
But it will be sluggish and the big Chinese steel mills won’t hesitate to bring as much pressure to bear on their raw material costs as they can next year
Chinese demand lifted slightly in the second half of 2022 and the difference between 2021 and 2022 import levels gradually narrowed from around 3% in August to around 2.1% with a month to go.
For the sixth year in a row the country’s imports had topped one billion tonnes by the end of November.
Trade data mid-week showed the country imported 1.02 billion tonnes of iron ore in the 11 months to November, down 2.1% on the same period in 2021.
With a month to go the final figure will end up around 1.1 billion tonnes or a little less.
China’s imports of iron ore in November rose 4.1% from October to 98.85 million tonnes (which was also down 5.9% from 105 million in November, 2021)
Iron ore imported started topping the billion tonne mark in 2016 and peaked at 1.170 billion in 2020. 2021 saw 1.12 million tonnes imported
According to a forecast from S&P Global Commodity Insights Chinese imports will drop another 1.4% in 2023 to 1.087 billion tonnes.
S&P Global said the slide in imports will be because of a rise in the number of Chinese iron ore mines – but most of these produce or will produce low grade ore which is more polluting to sinter (and upgrade) and yields less steel.
That is not what steel mills want but being state-owned or dominated, they will have to cop that and wear the financial and pollution costs.
And prices? Well that will be a function of seasonality, demand, Covid and the property crisis improving.
