China’s iron ore prices observe positive performance

Following the slight ascension observed in finished steel prices, China's domestic iron ore market posted a minor rebound over the past week. Meanwhile, given the recent rise in shipping freight costs, quotations of imported ore are expected to climb up in the near future. Additionally, China's iron ore inventory remains at high, nearly 70 million mt.

Driven by the increased oil prices and the ascended voyage charter volume made by Rio Tinto, BHP Biliton, and Vale, the international shipping freight index again picked up in the past week. By the end of trading on May 7, the Baltic Dry Index (BDI) reached 2,065 points, a sharp jump of 293 points week on week. Meanwhile, shipping freight costs from Australia and Brazil to China also climbed. On May 7, the average freight charge from Brazil to Beilun Port in China was $22.65/mt, up by $4.2/mt compared with the level on April 30. Meanwhile, the average freight rate from Western Australia to Beilun on May 7 was $9.29/mt, up $2.17/mt compared with the rate on April 30. In addition, the freight cost of Indian ore to China's major ports was at $12.37/mt, a minor rise of $0.87/mt week on week.

Given the improvement seen in China's finished steel market, prices of both domestic ore and imported ore showed certain rebound during the past week. At present, the price of 66 percent damp base iron ore in Tangshan, Hebei Province is up RMB 10-20/mt ($1-3/mt) to RMB 510-520/mt ($75-76/mt, tax excluded), while the market prices in the northeastern regions have risen RMB 10/mt ($1/mt) to the level of RMB 460/mt ($67/mt, damp base/tax excluded). Meanwhile, the prices of 63.5 percent Indian fine ore are at $54/mt FOB, while the CIF price (Tianjin Port) is around $64-65/mt. Additionally, the price quotation of 63.5 percent Indian ore is at RMB 540-550/mt ($79-81/mt) at Chinese ports, while the deal price of 62.5 percent Australian PB fines has remained constant at RMB 550/mt ($81/mt), with the market price of 65 percent Brazilian fine ore at around RMB 580/mt ($85/mt).

Looking at the current situation, China's domestic iron ore market still faces relatively strong pressure, against the recent port congestion of iron ore at Chinese major ports. With no signs of reduction in iron ore imports, China's steel mills still continue their mass importing activities. It is estimated that China's iron ore imports for April will hit new high in history. Currently, the relatively high crude steel production and the improving finished steel market in both home and abroad have both boosted the confidence of iron ore traders to a certain extent.

As regards the international iron ore contract price talks, it seems unlikely for the negotiation to yield any result in the short term, because both parties are still struggling for their own interests. Rio Tinto recently stated that they would not accept the reduction of 40 percent to iron ore price for the 2009 fiscal year, and they would terminate the contract according to certain terms in the contract if both parties fail to reach an agreement by June 30, 2009. However, right after Rio Tinto's statement, the China Iron & Steel Association immediately said that they are not scared if Rio Tinto stops iron ore supply. There are seven or eight iron ore suppliers in Australia, and besides Chinese buyers can also choose to buy iron ore from Brazil, India, and South Africa. In addition, China's own iron ore production can also meet 50 percent of its demand. According to the current situation, both parties are facing significant pressure and refuse to yield, so the negotiation will remain the stalemate.