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Can historic data provide iron ore price direction clues for 2014?

By Paul Bartholomew

January 14, 2014 - The weather induced iron ore supply disruptions seen in Australia and Brazil at the turn of the year are typically an annual event.

Iron ore production in the January-March quarter is always the weakest period of the year and is anticipated by buyers of the steelmaking raw material who ensure they are well stocked up beforehand.

But how strong is the correlation between the constrained supply and spot iron ore prices in the first quarter of each year? To what extent is there a direct impact on spot prices?

The following analysis considers Chinese steel output and domestic prices, along with iron ore production, import volumes and spot prices- all on a quarterly basis- to see what relationships can be identified that might provide some price direction guidance for 2014.

Analysis continues below...

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It acknowledges that looking at data on a quarterly basis may only provide a fairly rudimentary picture.

Further, there are always other factors that can influence market activity and prices, such as political pronouncements in China, credit constraints, weaknesses in China's export markets, and sudden collapses in trader/mill sentiment, among others.

Iron ore production patterns

It makes sense to begin where there are some clear and consistent trends. As mentioned above, iron ore production starts off slowly each year due to the heavyf rains and cyclones in Brazil and Australia.

Company data shows that total output from the four largest producers -Vale, Rio Tinto, BHP Billiton and Fortescue Metals Group -fell 14% in January-March 2012 and 8% in January-March 2013 on the previous December quarters.

Production then ramps up strongly in the April-June quarter. In both 2012 and 2013, total April-June output rose by more than 14% quarter-on-quarter.

Quarterly average iron ore prices CFR ($/mt)

In the second half of the year Vale really hits its production straps, catches up with its contract shipments (the Brazilian miner has declared force majeure the past two Decembers) and often places more tonnage on the spot market.

Meanwhile, Australian iron ore output typically plateaus over the back half of the year. Indeed, the July-September quarter in Australia is typically weaker than the previous June quarter due to most producers trying to export as much as possible before the end of the fiscal year on June 30 (or half-year in Rio's case).

However, this year is likely to be a different scenario as significant new capacity coming online from Fortescue and Rio should result in a big supply jump in the second half of 2014.

This is the main reason why many analysts are tipping iron ore prices to weaken by the end of tfahe year.

It is worth pointing out that just because the miners will be producing more iron ore does not mean there will a big increase in spot liquidity. Fortescue has stated many times that it intends selling all of its 155 million mt/year capacity on term contracts.

Despite the near two-week long Chinese New Year holidays falling in the first quarter of each year, China's crude steel output ramps up strongly in January-March from weaker December quarter production when demand typically wanes due to the colder weather.

First quarter output increased 5.4% in 2010, 11.7% in 2011, 10% in 2012 and 9% in 2013, all q-o-q.

Key price assessment monthly averages, December 2013

April-June output also rises on the previous quarter, albeit less dramatically, before crude steel production comes off in the second half of the year. Platts/SBB historic price data shows that domestic steel prices also generally strengthen in the January-March quarter.

The average quarterly hot rolled coil price achieved its strongest level in the first quarter of the past three years before declining over the remainder of the year.

China's crude steel production (million mt)

Quarterly iron ore price variances

Turning now to iron ore price data over the past four years, Platts' 62% Fe fines index reveals that January-March is the only quarter that has consistently showed a price increase -in some cases a q-o-q jump of 20-35%.

Chinese domestic HRC prices - quarterly average (Yuan/mt)

Supply disruptions both domestically -winter curbs iron ore production in China and can hamper transport links and availability -and internationally, along with stronger Chinese crude steel output and prices, generally support first quarter iron ore spot prices.

Iron ore producers are often working hard to honor their term contract commitments over this period, meaning they have less available tonnage to put on the spot market at a time when Chinese mills are ramping steel production back up and smaller mills and traders are looking for iron ore supply.

From the first quarter onwards, however, iron ore price trends are less apparent. They generally soften in the April-June quarter but this has varied from a 1.4% decrease from the previous quarter in 2011 to a 21.6% fall in 2013.

Using quarterly average prices can sometimes show dramatic q-o-q fluctuations if a quarter contains a month where prices crashed, such as October 2011 and August 2012.

There is inconsistency elsewhere. For example, in 2010, iron ore prices jumped 25.6% q-o-q but in October-December 2011 they fell 20% (largely due to the weak October mentioned above).

By comparison, quarterly average domestic HRC prices in China rose 3.4% and fell 11.3% respectively in the same quarters of 2010 and 2011.

The picture for the major iron ore import market of China is less clear. There is little evident relationship between the supply disruptions and the level of China's iron ore imports in the first quarter of each year.

First quarter imports have been 10% higher q-o-q (2012) and 3.4% lower (2013).

Quarterly average iron ore prices CFR ($/mt)

In fact, looking at China's iron ore import trends on a quarterly basis, there is little quarterly period consistency from one year to the next.

It often depends where Chinese mills are in the restock/destock process, while holiday periods can also distort iron ore import data.

What is clear, though, is that China had tremendous appetite for seaborne iron ore in 2013 with July-September imports of 216.7 million mt, up 17% on the previous year.

There are no reasons why this will not continue to be the case in 2014.

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