Macquarie Research reports “despite some reports and rumours to the contrary, Brazilian iron ore exports surged in August to near all-time highs. According to the reliable port-based data, Brazilian iron ore exports were 26.6 Mt in August, up 16.2% month-on-month and 2% year-on-year and fractionally below the all-time high seen in July 2008.”
The recovery in exports was taking place before Vale’s head of iron ore, Jose Carlos Martins, revealed to the market last week that Vale was restarting idled mines in response to strong demand for iron ore in Europe and Japan, implying even stronger export figures in the months ahead. The August export figure to China was a record high level of 15.854 Mt and given the 35-day shipping voyage to China, this will not show up in Chinese imports until September/October – China’s previous highest month import figure from Brazil was 13.6 Mt in May 2009. Brazil’s total exports to China January to August were 111.6 Mt, up a very significant 49% YoY.
Macquarie continues that “the recent flood of iron ore into China is evident from the trade data to July. July imports at 58 Mt were easily the highest ever, bringing total imports to 355.4 Mt for the first seven months of the year, up 32% or 85.5 Mt YoY. Given that steel production was only up 3% YoY over this period and that iron ore stocks in the ports (and on ships waiting to unload) rose only a modest 22 Mt, this appears to imply that there was a major decline in production and use of domestically-produced Chinese iron ore. Our estimates suggest that this decline was of the order of 30% YoY during the first seven months of 2009.
“However, the surge in iron ore prices on the domestic market between May and mid-August to well above this year’s Australian benchmark to Japan appears to have led to widespread re-opening of domestic iron ore mines in China. Our contacts in China suggest as much as 80% of the 100 Mt/y of closures (63% fe basis) may have restarted.”
“With the domestic iron ore supply demand now rebalancing from temporary shortage, spot iron ore prices have fallen sharply in recent weeks – 62% Fe product has fallen from close to $105/t cfr China to as low as $75/t cfr, but still remains above the implied benchmark price (due to a collapse in freight rates at the same time). We are now getting near to the price at which domestic ore producers had previously cut production so there is some confidence in China that spot prices may well stabilise soon.
“In the coming months we would expect Australian and iron ore exports to China to fall sharply as material is diverted to Japan, Korea, Taiwan and Europe. This is bad news for the shipping market since buyers in these countries tend to have their own ships or long term charters and don’t enter the spot market as frequently – less spot demand, shorter shipping distances (20 days to Europe from Brazil versus 35 days from Brazil to China), more new ships coming out of shipyards (a flood is expects in the coming months) and lower port congestion in China and all negatives for shipping rates. Lower rates will also reduce iron ore spot prices on a cfr basis (but may help to support fob prices).
“Despite the lower Chinese imports going forward (we expect just over 50 Mt/y for the rest of the year compared with 58 Mt in August), we still forecast that Chinese seaborne imports will reach an incredible 603 Mt this year, over 60 Mt above our previous forecast made two months ago! We have also raised our crude steel production forecast from 520 Mt earlier this year to 570 Mt to reflect the massive boom in steel demand this year (which is in part estocking after heavy 2008 destocking). Recent steel price falls suggest some over-production of steel in China but not weaker use (indeed we expect real steel consumption to be stronger in the second half of the year than the first due to ongoing growth in construction activity and stronger exports of steel containing products). We nevertheless assuming some modest steel production cuts in the fourth quarter to support prices. We also expect a small growth in exports of steel (but prices are still not attractive enough outside China to suggest strong growth in exports).
The recovery in Brazilian iron ore exports will continue on the basis of a revival in exports from Brazil to Europe, the Middle East and Asia ex-China which were down an impressive 52% YoY in the first eight months of 2009. Indeed the major rise in Brazilian iron ore exports in recent months has led us to revise upwards our Brazilian export forecast by over 20 Mt from the previous level. Higher than expected Indian exports during the monsoon season mean that Indian exports could well reach 115 Mt this year, 10 Mt more than our previous forecast. We estimate that the seaborne industry will operate at around 83% capacity in 2009, similar to 2008 but below the 90% utilisation rates in 2007 and 2008. In 2010, our preliminary forecast suggests a capacity utilisation rate of 89%, which should help support iron ore pricing.
Last Friday, Rio Tinto confirmed it has suspended iron ore contract negotiations with Chinese customers, although it continues to deliver ore at provisional prices. Iron ore chief executive Sam Walsh said he expected talks to resume, but didn’t know when: “Remember that we have our negotiators detained.”