• Peter Gadsdon

Iron Ore Outlook, Evergrande too big to fail and price forecasts into 2022 with Navigate Com

Mining Network: “Attila thank you for coming back onto the program. It's been probably one of the most turbulent months for iron ore in the last year or two I’d say. To start off with can you talk us through what's happened? Obviously last month we were talking about iron ore prices falling off a cliff a bit because of the CCP output reduction. We've seen a whole spiral of events around Evergrande come into play with things changing on a daily basis. What's the current update, can you talk us through what's happened over the last couple of weeks and really what's going on at the moment?”

Navigate Commodities: “Sure yeah, I mean it was really, I guess a week or two ago, it was really an extension of the steel production curves that we all know about. You know, the Chinese ministry of environment and ecology (if that's correct name for that particular department) and came out and said that actually there will be heavier cuts from now, until the end of March 2022. Specifically centred around the end of the Beijing Olympics winter elements. So that has really driven further declines in iron ore, as the market sort of faces this risk-off sentiments, regarding lower steel output and relatively lower mile consumption. So that's been driving the extent of the decline a couple of weeks back. Then you've had individual provinces struggling with some power restrictions and cuts. Restrictions of using electricity and so on and that's obviously been driven primarily by how high coal prices are. Which have been making it pretty difficult for heavy industry to operate, specifically we're talking steel, we're talking aluminium, copper and so on. So that that really sort of added more fuel to the fire and then in the last week you've had the news around overground come to the fore, and really sort of drive prices even lower than the market had anticipated. So, the low point hits about $93 a ton on SGX's October contract. So, since then the people bank of China have announced a cash injection, liquidity into the banking system. To protect against any imminent default of the many billions of R&D that they've announced. So, that obviously has provided a flaw to the markets and set the tone as well that actually China wasn't willing, yet, to let a company of that size fail. So, we go back to the old argument of are they too big to fail and obviously the answer is yes, they are too big to fail. Given the potential societal discord that could eventuate if they were to let a company of that size go bankrupt. So, since that time we've hit that low of $93 a ton and now we're currently sitting at about $112 a ton um so there's been quite a substantial recovery. I think it's more of a relief rally. The market completely ignored data on Thursday which showed that weekly rebar production had fallen by 12% to become weak, which was just phenomenal. I guess that's how oversold iron ore was, to completely not even bat an eyelid, at that kind of data. What concerns me is what's going to happen next? As well, I don't think we’re at the end of these steel production cuts. So, we could see some more heavy cuts coming in the next week or two. So, while we have this relief rally back up above $100 again it might not last for long.”


Mining Network: “Right, my next question was going to ask if Evergrande are bowed out? Whether or not the iron ore price will go back up to where we saw it last month? It sounds like that isn't the case either way. Steel production caps are going to keep that lower by the sounds of it. Moving forward in terms of what your outlook is for next year, I saw UBS release a report where they're predicting around the $89 per ton 62% Fe content for iron ore. Does that sound about right? Have you forecasted for next year? I know you do short and medium terms, so it'd be good to get your outlook on that.”


Navigate Commodities: “Yeah, I mean that level for the quarter coming, we wouldn't disagree with. Typically, q4 is quite a weak period. You have a pretty negative steel consumption quarter on quarter, year on year for q4 this year. Obviously, you should just typically, in terms of seasonality, that's you know cold weather impacts steel consumption and therefore the mills respond accordingly. This year we're going to have relatively low output anyway, given the government mandated cuts but we should still, probably see that seasonality appear in lower consumption and lower outputs, but it will be heavily muffled by the mandated cuts. Now looking forward to next year obviously q1 is going to be hit in terms of steel production as well. The output will remain low during the winter Olympics to ensure blue skies and good air quality. You know, because China will be on the international stage and specifically the capital will be on an international stage. For the rest of the year $89 to me seems a little bit on the various sides. So, you know we still haven't completed, or we have still haven't seen the full effects, of the huge amounts of stimulus that's been released to tackle covid. We'd sort of be looking to anywhere between the $90 and $110 range. That's not massively far away from UBS but I think that's a fairly comfortable range, where it should be sitting. I mean the q2 is typically a strong quarter for steel consumption in China, so I think once Beijing sort of exits from centre stage after the Olympics you may sort of see these mandated production curbs sort of eased. Even potentially removed.”


Mining Network: “Oh okay, so are you thinking that with the Olympics coming up it's a play to reduce pollution in the build up to that, is that the idea?”


Navigate Commodities: “Absolutely because it's going to be televised all over the world and you can just look at social media and people are posting pictures of blue skies and so on. It obviously puts China in a good light and more importantly the environmental impact which is the most important part of all. I guess most of the analysts in resources, natural resources and heavy industry are always quite sceptical about China's policies and metrics and whether it's going to last, whether they'll stay the course. So far it had been looking like they would stick true to their agenda, but then you do get events like Evergrande, where they go back to the old playbook. Then again you can't criticize because the US, UK and Europe have done the same things in the past with their banking industries. So, we can't pick on any one nation.”


Mining Network: “No, of course. One of the other areas I wanted to touch on actually, is if we are going to see China potentially remove these caps next year? If investors are looking at iron ore at the moment or over the next quarter, (when it may even reduce further), is that a potential good buying opportunity for investors? Or, are we looking at next year if these caps are removed, that we could go up way over $100 per ton again? Maybe touching towards $150-$200 again?”


Navigate Commodities: “I think that was, not a one-off but that was a particularly freak occurrence. I don't think that's going to be part of the course. We don' see much upside above $120-$130 for next year. We have more short-term views, so we look at advising on trading the intraday and the intro week and so on. So, that means there's always money to be made. So, it is possible. I mean if you're looking at a sort of quarter on quarter, or year on year view, then it's probably going to remain relatively steady by comparison to the year that's just occurred. I guess you can always look at potentially selling the rallies and buying the dips, is the generic trading terms and looking for opportunities when it's oversold or overbought. That's what we typically do and typically advise on. So, there are always opportunities. One thing I would sort of guard against, the upside risks for iron ore at the moment. One is as you mentioned and as we mentioned as well is, the easing of production curves, that's one. Secondly, the longer the price stays below $130-$120 a ton, you're going to start seeing supply response from the small cap miners. You've already started seeing it in drips and drabs in the press. There's one mine in Australia that's idle production because it's dipped so far below its cost of production. Obviously, there were a plethora of mines coming back on stream over the last sort of six to nine months because at $235 a ton, everyone's making money. Everyone's owning yachts and Ferraris. Once you get below sort of $145-$130 then a lot of companies start looking why they're in trouble. So, it's better to sort of idle by the production and wait for the price to recover. The question is do we recover back to a sustainable level for them to be able to operate? So, we may start seeing more headlines in the press about these smaller cap miners shelving operations for this time being. So, those are the two major potential upside risks, but you know, you've got to do the math and see how China's steel production curves. If maintained, that's not going to really make a difference whether these small caps are out of the market or not.”


Mining Network: “Okay, well thank you so much for your time, Attila, it's always an interesting time for iron ore at the moment and hopefully we'll have a catch-up next month to discuss and see what's happened again.”