Monthly report: Iron Ore Market May Fluctuate around a Low Level in Q4

Steel market stopped decline and began to rebound in China stimulated by government's RMB1 trillion worth of infrastructure projects investment. US's QE3 also pushed up steel prices. Under rising steel product prices, imported iron ore market prices entered into upturn in early September. However, price uptrend didn't continue for a long time and market prices began to show corrections in late September. HSBC Holdings PLC announced that China Manufacturing Purchasing Managers Index stayed at 47.8 in September, indicating that China manufacturing growth was slowing and manufacturing remained sluggish. China domestic steel production fell back, but the situation of unbalanced supply and demand had not changed largely. Market demand was unlikely to increase sharply and iron ore market prices were expected to sustain fluctuations.

I Chinese Iron Ore Supply & Demand Situation in August 2012　

China produced 445.597 million tonnes of pig iron during the first eight months of this year, rising by 2.6% year-on-year. Pig iron output amounted to 53.744 million tonnes in August, dropping by 261,000 tonnes or 0.5% YoY and 2.577 million tonnes MoM. It equaled to iron ore demand of 85.99 million tonnes, dipping by 4.6% MoM or 0.4% YoY.

China iron ore import totaled 62.45 million tonnes in August, rising by 7.9% or 4.58 million tonnes MoM. Average price for imported iron ore was US$129.9/tonne, down 3.6% from that of July. China iron ore import amounted to 486 million tonnes during the first eight months of this year, up 8.7% on a yearly basis. During the same period, average prices stayed at US$137.6/tonne, dropping by 16.3% YoY. Iron ore import growth was attributable to the obvious decline in iron ore import price. Imported iron ore had an obvious price advantage over domestic iron ore. Steelmakers increased their usage of imported iron ore and basically stopped domestic iron ore purchases. Additionally, market expectation for traditional peak season also increased iron ore imports.

Along with largely slipping iron ore import price, domestic iron ore concentrate gradually lost ground on its low price. More and more domestic iron ore miners began to reduce their production. China domestic crude ore production stayed at 116.569 million tonnes in September, increasing by 0.95% MoM or 10.7% YoY, equaling to iron ore concentrate of 39.45 million tonnes. Total market supply reached 101.9 million tonnes, surpassing the same month demand by 15.91 million tonnes. Oversupply problem could not be eased. Domestic crude ore output touched 839.023 million tonnes in the first eight months, going up by 16.1% year-on-year. The price gap between imported iron ore and domestic iron ore concentrate narrowed down. Steel mills raised imported iron ore purchases, which suppressed domestic iron ore market to some extent. The amount of domestic miners who stopped production or exited from the market increased.

　　
Table 1: China Iron Ore Supply & Demand in 2011-2012 (in '000t)

Table 2: China Iron Ore Imports by Varieties in 2011-2012 (in '000t)

　　　　
II Review on Iron Ore Spot Market in Q3 2012

Imported iron ore market prices edged lower in the third quarter. Swap transaction price at SGX for mainstream product dropped as high as 31% in July and August. Imported iron ore dropped rapidly in this July and hit 4-year record low under the speedup in oversea iron ore project expansion and slowing China domestic economy. Foreign quotes for Australian iron ore (Fe: 62%, DMT) dropped below US$90/tonne. Market worries spread and transactions stayed sluggish. Finished steel products sales and capital withdrawal remained unfavorable. Additionally, iron ore prices always maintained at a low level under steelmakers' cost pressures.

Imported iron ore prices continued the downturn in July. Meantime, foreign quotes and billet prices both went down largely. Billet price dropped by RMB80/tonne and RMB180/tonne in two consecutive weekends. And then PB fines prices decreased by RMB970-980/tonne to RMB840-850/tonne. Foreign quotes also dipped from US$138/tonne to US$118/tonne. Under rapidly slipping iron ore prices, steelmakers who held high stocks or had long-term iron ore contract faced great difficulties in their operation, while some steel mills focused on spot market resources purchases showed strong anti-risk ability. However, steelmakers' enthusiasm for production was poor on account of insufficient steel product orders.

Imported iron ore prices went down continuously in August, with larger decline than that of July. Foreign quotes entered into downturn along with high crude steel output. Market prices touched below the psychological price. Transaction price stayed sluggish. Foreign miners increased their tender invitation activities in early and middle August, indicating that long-term contact ore faced great pressures. Against such a backdrop, spot market prices also dumped. Spot market prices for PB fines dropped from RMB850/tonne at the beginning of this month to RMB640/tonne at the end of the month. Traders had no good expectation for the coming market influenced by the large losses resulted from the large decline. They dared not replenish their stock rashly and focused on inventory reduction. Large traders also held small resources. Steel mills kept their stock at a low level under cost pressures.　

Imported iron ore market faced fluctuations in September. The prices sustained rapid decline and weakness at the beginning of September. PB fines price slipped below US$90/tonne. But traders and steelmakers said that it had great difficulties in further decline of US$10/tonne. Furthermore, spot market faced the problem of cost overdraft. Market participants began to control shipment and transactions rebounded. Partial traders increased enquiries. In middle September, market sentiment recovered given Fed's QE3 policy. Additionally, market transactions stayed good stimulated steelmakers' replenishment. Imported iron ore offers and transaction prices rally. However, futures market resources were not sufficient and downstream market buyers showed low desire to participant. Only traders involved in to seek profit, indicating that steelmakers had insufficient confidence toward the futures market. Along with coming National Day holiday, steel mills began to replenish stocks to maintain normal production. Imported iron ore stayed at a stage of fluctuation.

III Imported Iron Ore Market Forecast in Q4 2012

Domestic steel traders were not optimistic toward the market in October. Market was still fluctuant, although domestic steel prices rebounded. Downstream market demand stayed flat after short-term release. Steel prices came back to corrections in late September. Most steel trading companies had no plan to replenish stocks before the holiday. CISA's data showed that daily crude steel output for key large & middle-sized steelmakers amounted to 1.5227 million tonnes in middle September, down by 2.73% compared with that of last quarter. It was estimated that crude steel daily output around China would stay at 1.8565 million tonnes in middle September, slipping by 2.01% from that of last quarter. Leading steel mills' Oct price adjustment indicated that they were cautious toward coming steel market. Many steel mills expressed that their orders were unfavorable. It was predicted that imported iron ore market prices might turn into corrections after hitting a high level after the National Day holiday. Imported iron ore prices were likely to fluctuate around a low level in the fourth quarter under the economic uncertainties in the world.　　

IV Review on China Domestic Iron Ore Market in Q3 2012

Commodity markets suffered great hit after entering this year with sluggish transactions and so did iron ore. Domestic iron ore market remained the weak-running trend in Q3 with deep falls for times despite slowing appetite from steelmakers.

On one hand, steel consumption growth softened significantly under current macroeconomic situation; on the other, miners were reduced production to push up prices, showing a weak-going with ups and downs on them market and the market trend in Q4 would remain in the same dilemma.

Shocks from commodity markets and financial markets had been increasingly affected the iron ore market in much more rapidly since Q2. The end-users demand of steel products had been reducing for months, hitting down the profits of steel producers. Under this circumstance, without good profits, steelmakers destocked their iron ore inventories from previous 30 days or 45 days to recent 10-15 days for saving money in remaining normal running of the companies.

That hit the iron ore demands greatly and even made the iron ore price dropped to historical lows. Despite the production cut of small steelmakers, predicament went more severely.

Unsettled global financial market as well as slowing Chinese economy hit raw material market for quite a long time and still going on with the price remaining in low. As to offer of concentrates prices in Tangshan area stayed at RMB 1000-1030/tonne on Sep 27, dropped 12.2% from RMB 1140-1160/tonne on Jul.

V Domestic Iron Ore Market Forecast in Q4 2012

Downturn in global economy situation combined with slowing appetite of steel products dragged down iron ore market in China. As the price had been touching the bottom, the Q4 domestic iron ore market would be stagnation at low level.

Macro-economy situation is the most significant factor for the market. The European debt crisis intensified, since the beginning of this year, could not find a solution yet and also dragged down China economy. China Manufacturing Purchasing Managers' Index (PMI) was 50.1% in July this year, while the index was 49.2% in August, down 0.9 percentage points compared with July. Although the government investment increased of trillions to approve a number of infrastructure projects, still failed to change the status quo of the economic downturn. The economic downturn led to reduced demand for steel, steelmakers pace eased the procurement of raw materials, eventually leading iron ore prices continue to edge lower.

However, the domestic iron ore prices have been near the bottom, with the continued decline in the price, the mining enterprises profitability decreased day by day, some small and medium-sized mining enterprises have closed down, leading supply decrease in the market. If prices fall further, domestic iron ore companies will appear in large losses, which will further suppress the amount of domestic ore supply, therefore, the possibility of a renewed decline of the post-ore price will remain volatility state in low price level.

VI Review on Dry Bulk Shipping Market in Q3

By capacity supply and demand imbalance serious impact in the third quarter of this year, the international dry bulk shipping market remains in the doldrums, the Baltic Dry Freight Index averaged of 849 points, compared to the second quarter average decreased of 17%, the BDI index fell in September 12 to 661 points, approaching the record low of 647 on the first half on February 3.

In Q3, Capesize, Panamax indexes averaged at 1265 and 840, down 10% and 30% separately. Oscillations downstream in international crude oil prices, transport costs have fallen sharply, undoubtedly a major positive for shipping companies. But oil tariff support a more limited role as tariffs decline is much larger than the decline in operating costs, all shipping companies is still in serious loss, and the greater of the shipping capacity of vessel, the greater loss occurred, especially for the Panamax vessels. More serious problems is that the commodity demand is not strong, the price continued to fall, while the new capacity is still continuing, since tariffs are still low oscillation consolidation, without any signs of improvement yet.

The substantial growth in the capacity and the relatively slow growth of the global commodity trade occur at the same time. Due to the impact of the European debt crisis, the global commodity imports in the third biggest region of EU-15, this year, showed negative growth in imports and for other countries also stayed at a low level, pulled down the growth rate of global commodity. In September, steel prices rose retaliatory few days and then began to fall, but boosted market confidence somehow. Insiders pointed out that steel prices rebound to reverse the steel market have always been in the doldrums, but the supply and demand remained in sharp contradiction. The economic environment is not good under the influence, the later steel market will continue to shock run.

China, as the world's largest iron ore and coal importing country, has a decisive impact to the international dry bulk market. Due to macroeconomic adjustment and steel production overcapacity affected cooling demand for iron ore and coal, even if China continue to release liquidity to stimulate the economy recently, but its effectiveness is still a large uncertainty. With domestic coal prices decline, the gap between domestic and international coal prices are also gradually reduced, leaving eased coal imports this quarter. Anyway the demand in cooling, while China's imports of commodity prices has become a decisive factor, such as international commodity prices continue to outperform domestic, import activities are still capable of continued or international dry bulk shipping market will result in greater volatility.

For shipping capacity, due to the market downturn, new capacity pressure may be eased over the first half in Q3, but the additional capacity due to the previous cumulative market clearly under pressure, enlarging capacity supply and demand imbalance. International dry bulk shipping market in the short term will continue to remain low oscillation- the situation is still quite grim. Many famous international shipping advisory predicted that recent international dry bulk shipping market to absorb the excess capacity and need at least a year and a half to 2 years to get of the mud, or even longer.

Affected numbers of major adverse factors, the coastal shipping market remains in the doldrums in the third quarter of this year. The recession has been more severe than the low ebb, when the financial crisis happened. Especially since April, when rates fall into the operating costs line, the drop continued with quite limited space, leaving some tiny shippers' vessels having no cargo to ship till now since then. And "boat off" phenomenon had been also spreading to other shipping companies, leaving the entire shipping industry in a serious loss being dilemma. As data shows, all listed domestic shipping companies on A shares suffer nothing but losses in Q1, and the situation turned more severe in the second quarter, expanding losses further in Q3 and failed to show any better signs.

VII Dry Bulk Market Forecast in Q4

Global shipping market since last year has been showing a declining trend and the negative factors affecting the market in the near future without any positive signals.

First of all, from a macroeconomic point of view, macroeconomic policy would remain in stability in H2. Infrastructure investment plan announced last week that demand for steel impact than initially expected a longer time will need to cover the next few years. Summer peak came to an end and when in Q4, the thermal power generation growth in eastern coastal cities may continue to slow down with possibilities of negative growth in some major cities will hit the demand for coal from a sharp rebound. But also by the effects of the drought in North America, the fourth quarter should have hot food season will not be too big turnaround.

Second, the serious excess capacity could not be improved in short term. The aging ships ration of fleet is not a high number anymore and new orders in 2009 and 2010 will continue to inject in the end of 2012 and early 2013. The pressure of excess capacity is growing. Followed by ocean shipping market, the capacity supply and demand serious imbalance is also puzzled the market players and the continued downturn probability is still relatively large.

Overall, unfavorable factors still prevail in Q4, the capacity supply and demand imbalances unlikely to reverse in the short term; time for the market to go out of the downturn is still quite a long way to go.