Historic global steel price rally sweeps iron ore to all-time high

The staggering recovery of global steel demand last year has driven the market for its main ingredient, iron ore, soaring in recent months, and helped S&P Global Platts 62%-Fe IODEX CFR China reach an all-time high of $193.85/dmt on April 27.

The red dirt has seen its price more than double over the past 12 months from $83.40/dmt on April 27, 2020. And as the world turns to infrastructure to stimulate its post COVID-19 recovery, and as other industrial metals show comparable rises, it could indeed be reasonable to ask how much further this rally could go.

What we are witnessing is the continuation of a demand-driven trend that began exactly a year ago, when China saw a fast rebound in economic activity following its rapid exit from lockdown, which was immediately matched by a sudden spike in steel prices.

China produces over 55% of the world's steel and buys over half its seaborne iron ore. The recovery was underpinned by China's 2020 stimulus package which contained Yuan 4 trillion ($153.8 billion) of relief for industry, on top of Yuan 2 trillion in fiscal spending, targeted at the infrastructure sector.

For a few months, China's strength was offset by weaker steel demand in other countries still grappling with the virus. But in the summer, global steel demand began rallying too, adding to China's already considerable appetite for iron ore.

Germany turned the corner in July and the US in August. They never looked back. Since summer 2020, global steel markets have been experiencing an unprecedented rally—in just nine months, hot-rolled coil prices in the US have more than tripled, while they have more than doubled in Germany and Brazil.

The current steel price trajectory suggests there is more room for immediate upside, and observers feel this trend could be sustained for some time, supported by infrastructure-heavy global stimulus plans. The largest by far will of course be US President Joe Biden's $2 trillion "once in a generation" infrastructure plan, which, even though it's been noted to include a large chunk of spending on items not traditionally regarded as infrastructure, would involve fixing 30,000 km of roads and 10,000 bridges.

At the same time, Chinese fundamentals show few signs of tapering off. The country produced 271 million mt of steel in Q1 2021, flat from Q4 2020. Steel inventories have kept dropping, reflecting strong demand both locally and for export, while profit margins at mills are at elevated levels of $135-$175/mt.

There is, however, growing nervousness about the Chinese government's stated aim of cooling an overheated property market via a gradual tightening of credit supply, and Premier Li Keqiang has also recently made note of rising raw material prices as a concern, though without signaling any clear policy actions.

The resilience of iron ore prices has been compounded by tight supply, particularly in the last three months, as both Brazil and Australia experienced seasonal production reductions. Australian miners Rio Tinto and BHP saw a decline in production by 11% and 5% quarter over quarter respectively, while the largest miner in Brazil, Vale, saw its ore production drop by 20%. These constraints are expected to ease in Q2, however.

While the market as a whole is clearly buoyant, certain pockets of the iron ore market have shown particular strength. These include high-grade iron ore fines produced by Vale, as well as "direct feed" products such as lump and pellets. These have been supported by Chinese government policies aimed at curbing its resurgent pollution problem observed in recent months, in what may be a start to its long march toward carbon neutrality.

These are extraordinary times for steel, and it seems likely that iron ore will continue to move in the orbit of its larger, downstream cousin. Chinese trends will continue to have the biggest sway, but surely global infrastructure spending will need to be watched. The last time iron ore neared the $200/mt mark was in 2011, a few years after China unleashed its $586 billion stimulus package in 2008, an amount that is dwarfed by the latest announcements of Western governments.