Feeling the heat: 5 key features of iron ore markets in 2021

After a rollercoaster year in the iron ore sector, Niki Wang takes stock of some of the biggest themes that emerged in 2021, from price volatility to an increased focus on specifications.

High volatility

Iron ore prices have been on an uptrend since late 2018. Improving steel mill margins since China's steel sector supply-side reform – the attempts to eliminate excess steel capacity – have boosted iron ore demand and prices.

Temporary imbalances of supply and demand over the last three years have resulted in a highly volatile market. The benchmark Platts 62% Fe IODEX hit an all-time high at $233.1/dmt on May 12, 2021, before plunging back to $106.75/dmt on October 29.

Over the first ten months of 2021, the annualized volatility of the iron ore benchmark has been close to 54%, higher than that of most other metals. However, volatility has been a regular feature of the iron ore market and is merely returning after an extended period of stability in 2015-2018, at the bottom of the cycle.

Supply struggles to catch up

Firm iron ore demand from China has been a key contributing factor in rising global iron ore prices since 2018.

China's crude steel production has risen steadily to 1.065 billion mt in 2020, from 928 million mt in 2018, despite the disruption caused by COVID-19. The strength has extended to 2021, with a record 563 million mt of crude steel produced in the first half, supported by healthy downstream demand, including from machinery, manufacturing and construction. Despite stringent production restrictions in the second half to meet nationwide decarbonization target and power rationing purposes, China's crude steel production is expected to stabilize at 1.065 billion mt in 2021.

India, while certainly on a smaller scale, has also seen strong growth in the steel sector, resulting in the country's annual crude steel production hitting the 100 million mt mark in 2019. Since then, growth has been impacted by COVID-19. However, iron ore supply is lagging the rising demand.

Brazil, in particular, has struggled to meet its stated targets, thwarted by mining accidents, extreme weather and unexpected maintenance, as well as the pandemic. According to Platts cFlow iron ore shipment data, export volume from Brazilian miner Vale was down by 18.9% in 2019 and 2.4% in 2020, in year-on-year comparisons. And the top four Australian miners combined were unable to fully compensate for the lower volume from Brazil, their own exports rising by 0.5% in 2019 and 3.2% in 2020. Still, Vale remains the main source of expected growth in the coming years, as the miner aims to reach a production capacity of 370 million mt of iron ore by the end of 2022.

With demand having risen so dramatically, many observers expect the market to remain tighter than in the past, at least until sizeable new production starts coming of out West Africa.

China policy

Steel mills in China now change their preference for different grades of iron ore faster than ever, on the impulse of policy changes and fluctuations in profitability.

Over recent years, mills have been expected to respond quickly to a range of policies, from localized output and logistics controls, clear skies rules, and nationwide capacity reductions, to unscheduled inspections for ecological and environmental protection reasons, as well as strategic long-term macroeconomic or environmental targets.

More recently, the situation has primarily been one where output has been curbed but profit margins have been high, resulting in preferences for high-grade and low-contaminant iron ore aimed at maximizing pig iron production.

Platts 65% Fe and 62% Fe indexes increased in value by 46% and 42% respectively from the start of 2021 up to May, before they started to retreat, while the 58% Fe index was up by 29% during the same period.

The preference for premium cargoes has led to much better spot market liquidity for high- and medium-grade iron ores than for the lower grades.

Specs and performance

The pandemic has impacted regional steel markets in different ways. Variations in the pace of recovery between countries and regions have resulted in a staggered rebound in iron ore demand.

Sellers have been required to ship cargoes first to the regions fastest to recover to meet blast furnace appetite, while other regions were still suffering lockdowns and plant closures. This has meant that beyond just China, traders have had to keep a sharper eye on global trends.

With variation in global burden mix preferences and demand for specific types of ore, traders have been forced to take a more brand-differentiated approach to their strategies than in the past. This in turn has led to a need for in-depth understanding of global brand specifications and of the respective technical performance of each iron ore product.

Decarbonization

Every actor in the supply chain is increasingly turning their attention to the challenge of decarbonization, from mining to shipping to steelmaking.

Under the impulse of their ESG-conscious investors, miners are painstakingly reviewing their operations, including truck fleets and power sources.

The scale and difficulty of the challenges for mills are greater, though, and will require either critical technological breakthroughs or abundant availability of cleaner hydrogen.

Steel emissions are a global problem requiring both global and local solutions. Increased scrap use, use of higher-grade raw materials in production and technology upgrade are some of the likely steps on this arduous path.

In September 2020, China announced its goal of becoming carbon-neutral by 2060, indicating that the largest steel producer in the world is prepared to embark on this transformative journey. It will be interesting to see how much of a leadership role the Chinese steel industry will play in this global effort.

A version of this piece was first published in the October 2021 issue of Insight magazine