Iron ore displays safe haven qualities amid commodities rout

London — Iron ore prices – which touched a five-year high mid-2019 on supply issues before slipping back – have remained comparatively strong so far during the coronavirus markets crisis, leading some players and analysts to describe the steelmaking ingredient as a safe haven compared to other metals commodities.

The hypothesis is strengthened on perceptions that iron ore demand should now start rising again as China rebuilds production at some steelworks and manufacturing facilities as the rate of transmission of coronavirus within the country slows. However, the time scale of any real steel market recovery is unclear as steel inventories in China were described Monday as being at an all-time high, around three times traditional levels; according to China's Mysteel, stocks of rebar for construction, hot-rolled coil for autos and domestic appliances and three other key steel products rose to a new high of 25.27 million mt last week.

For William Chin, head of commodities at Singapore Exchange (SGX), a major iron ore derivatives exchange, iron ore remained a standout performer against a broader commodities and equities rout Monday as oil prices plunged. Even though S&P Global Platts assessed 62% Fe iron ore delivered China down $2.30/mt to $87.20/mt Monday, its price is still nearly 7% higher than one month ago and 5% above the levels of one year ago, shortly after miner Vale's fatal tailing dam accident in Brazil curtailed supplies.

"Iron ore is exerting 'safe-haven' resilience on Monday, with a combination of coronavirus concerns and an oil price plunge leading to a decoupling of correlation in commodity markets," Chin told Platts. "Iron ore remains well supported as a macro proxy for China activity -- mirroring signs of a pickup in industrial steel-making activity in China, the likelihood of increased policy stimulus by Beijing to support growth and in part possible optimism of improving virus stats in China."

According to some observers, iron ore is being increasingly led by the paper markets.

Jefferies International analyst Christopher LaFemina said in a note Monday he "expects iron ore to be a relative safe haven in mining as China begins to recover while the rest of the world slows. Rio and Vale will likely practice what they preach and respond with production cuts as demand weakens in the near term before Chinese imports pick up ... we believe consensus iron ore price forecasts are too low, although near term price risk is lower."

Of the major commodities, iron ore would benefit most from a recovery in China, especially if steel-intensive stimulus measures kick in, as expected, according to LaFemina.

Bank of America noted Monday that "China has been in a terrible spot and the health emergency has swapped over to World ex-China. On the back of recent issues, steel inventories remain very high. Yet, steel transaction volumes are now well off the lows, approaching levels seen in previous years."

Neelix Consulting's iron ore specialist Jose Carlos Martins noted Monday that even during the most sensitive period of the coronavirus outbreak, iron ore fundamentals remained strong and now that industries in China are resuming operations, steel consumption will increase, as "infrastructure investment is the only reliable tool the Chinese government has to foster China's economy in the short term."

Moreover, Martins continued, "outside China iron ore consumption is too low (30% of total demand). If China does well, iron ore will do well."

Not all perceive safe haven

Iron ore is not traditionally considered a safe haven, and may face market resistance as such.

"I don't know what definition others have got for safe haven here, but iron ore doesn't protect investors from market downswings, particularly when we compare to those traditional safer assets such as gold," said ING Economics' Wenyu Yao in an email.

Certainly, in the short term, iron ore's safe haven appeal may be severely tested, not least by steelmakers pushing for lower prices to improve already strained production margins in an uncertain market scenario.

Iron ore prices "are likely to correct sharply before recovery; we also expect shipments of iron ore to fall reducing sales and earnings for Rio Tinto, BHP and Vale," SP Angel's John Meyer said in an email Monday. "Traders are still waiting for permission to ship orders of steel and other products within China, while ports are struggling to unload shipments, rail operators are struggling with train drivers."