CANBERRA: The share of Chinese iron ore imports held by Australia and Brazil has fallen to its lowest level in almost two years, as smaller producers including India, Iran, Peru, Mongolia, Russia, Indonesia and Malaysia ramp up their export to the world’s most important steel market.
Figures from Adiran Lunt, head of commodities research at SGX, show Australia and Brazil collectively accounted for 81.5 per cent of Chinese imports in the June quarter of 2016, down from 84.3 per cent in the March quarter. It was the lowest quarterly level since the December quarter of 2014.
During the second quarter, Australia iron ore exports to China rose 7.3 million tonnes, while Brazilian supply fell 3.5 million tonnes. But exports from “other” regions jumped 8.8 million tonnes. This included some big rises from individual countries. For example India’s iron ore exports to China in the first half of 2016 were three and a half times higher than in the whole of 2015. While the iron ore price was as low as $US39 a tonne in January, a surge in Chinese steel demand prompted by government stimulus helped take the price to $US70 a tonne in April. The price retreated as low as $US48 in May, but averaged $US55 a tonne for the June quarter.
Mr Lunt told The Australian Financial Review that moves by Australia and Brazil’s low-cost miners to increase supply last year had almost pushed many smaller, high cost players out of the market. But the sudden pick up in Chinese demand and the subsequent jump in prices had helped them hang on. “Some of these guys had left the market, but perhaps not for so long that they couldn’t come back.” Mr Lunt said it indicated that a price of $US60 a tonne was a level where smaller producers were incentivised to re-enter the market.
But he stressed that the deeper, more liquid futures market was also helping these smaller miners to use hedging strategies to lock in better prices and stay afloat. “If I’m hedging 50 per cent of my production that also makes it easier to get funding,” Mr Lunt said. “It de-risks their cash flows and gives them a bit more confidence that they can come into the market and actually stay.” While BHP Billiton and Rio Tinto have favoured spot pricing in markets such as iron ore for more than a decade, Mr Lunt says institutional investors were increasingly interested in debating the merits of using hedging again in volatile markets. “Investors are asking a lot more questions around hedging – attitudes seem to be changing.”
