Is further steam left in iron ore prices?

What's Buzzing 

Aided by optimism around China reopening, global iron ore prices have witnessed a sharp uptick over the last few months. 

Context 

Global iron ore prices have increased by ~65% from October 2022 lows. Global iron ore prices, which were at ~US$79/tonne in October 2022, are currently hovering at ~US$130/tonne. 

Our Perspective: 

Global iron ore prices have seen an uptick primarily due to relaxation of Covid-19 related restrictions in China. The uptick in iron ore prices is being supported by restocking by steel mills in China. Also to support steel demand, easier monetary policy and loans are some key measures undertaken by China to provide a fillip to construction activity. Subsequently, there are expectations of a pick-up in infrastructure and construction activities in China from Q2CY23 onwards. Global mining major BHP also has a positive demand outlook for the Chinese economy for CY23. As per BHP, China has started CY23 on a positive note wherein green shoots are visible in key areas like new loans, house prices, business sentiment surveys, etc. This augurs well for steel as well as iron ore demand. Historically, in China, iron ore inventories typically build up during winter as construction activity winds down but stockpiles then tend to draw down from March as steel production ramps up to meet rising demand as construction activity again accelerates. As on mid-February 2023, iron ore inventory at Chinese ports was at 141 million tonnes (MT), down 12% YoY. With the ongoing demand recovery, relatively lower level of iron ore inventory at Chinese ports does provide headroom for further uptick in iron ore prices. In terms of quantum, China buys ~70% of global seaborne iron ore and, hence, has a huge influence on determining global iron ore prices. With respect to the Indian markets, an increase in iron ore prices augurs well for domestic steel players such as Tata Steel and SAIL, which procure 100% of their iron ore requirement through captive sources. Higher global iron ore prices, generally, also lead to an uptick in global steel prices. In such a scenario, companies that procure 100% of iron ore requirement through captive resource have an advantage. This is because while their iron ore costs remain largely unaffected, the companies with full iron ore integration do benefit from higher global steel prices in the form of better realisations.