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The Ore Score: What in the World is going on with Iron Ore?

May 13, 2019

We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.
We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.

 

  • Iron ore has been on a tear since November, rising almost 50%, as the chart below shows
  • The iron ore market had a huge dusruption in recent months when Vale (VALE) of Brazil suffered a horrific tailings dam collapse, killing over 250 people
  • Vale was forced to remove 93 million tons of production in the wake of the disaster, disrupting the supply dynamics in the global market today

 

Iron Ore Open Futures Contract (Chinese Yuan) - 1 Year

iron ore open contract

Source: Bloomberg

 

  • Production volumes in 1Q19 for iron ore volumes fell 5.5%y/y to ~250mt, representing the weakest yoy growth since 2012.
  • Production volume declines were primarily led by Vale and Rio Tinto, the 2 biggest supplier of iron ore in the world today
  • Both Vale and Rio Tinto suffered production problems that included mine stoppages following the dam rupture, disruptive weather and fire
  • Supply should remain constrained for the foreseeable future given the following situations:
    • Vale has guided for production in the range of 307-332M  in 2019 (only reaching its original 2019 production target of 400mtpy in 3 years); a huge difference in expectations versus just a few months ago
    • Anglo American (LSE:AAL), another global producer may not be able to get a final license to expand the tailings dam in Brazil
    • Iranian exports of 15-20mt per year are likely to be affected by US sanctions
    • Rio Tinto and BHP Billinton (ASX:BHP) each had operating issues earlier this year, and the potential for a supply response from other producers is very limited
  • The supply chain is being de-stocked, and inventory of iron ore at Chinese ports is now falling (down 15mt over the past month and down26mt, or 16%, over the past year)
  • With strong steel prodution in China, consumers of ore are depleting domestic stock
  • While the picture from the above dynamics paint a bullish picture for iron ore, the real question is: US vs China
    • A deepening of the trade war could curtail Chinese imports, hurting prices
    • The higher price now could compel higher cost/lower quality producers to restart production, also potentially hurting prices
    • A cooling of Chinese steel prodution-presently strong-could soften demand, also negative for prices

 

Iron Ore Spot Price - 62% Import Fine Ore CFR Qingdao (USD) - 1 Year

qingdao

 

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