While it’s well-known that markets can have irrational short-term moves, the 4 percent jump in Asian spot iron ore on Wednesday must be a more extreme case.
Spot iron ore jumped to $52.90 a tonne from $50.80 on April 20, continuing its rally from the record low of $46.70 reached on April 2.
On the surface the catalyst for Wednesday’s spike was BHP Billiton’s announcement that it would defer an expansion of its output of the steel-making ingredient from 270 million tonnes a year to 290 million tonnes.
The future loss of 20 million tonnes from a market that’s oversupplied by multiples of that amount clearly isn’t a sound basis for a price rally.
What it does show is a market where many participants are keen to call a bottom, and are happy to grasp onto any positive news as justification for a price rally.
It also shows that many in the market weren’t really reading into this week’s quarterly production reports from BHP Billiton, Rio Tinto and Brazil’s Vale.
Vale, the world’s biggest iron ore miner, produced 74.5 million tonnes in the first quarter, a gain of 4.9 percent from the same period a year earlier.
Second-ranked Rio Tinto actually produced more than Vale, mining 74.7 million tonnes, a gain of 12 percent over the year earlier period.
Rio Tinto affirmed its target of reaching 350 million tonnes of production in 2015, which will more than likely see it knock Vale off the top perch.
BHP Billiton, the third-biggest iron ore miner, saw output jump 20 percent in the March quarter to 58.9 million tonnes, and it raised its fiscal year target to 250 million tonnes.
While it’s true that Rio Tinto and Vale shipped lower amounts in the first quarter from the fourth quarter of 2014, it’s also a fact that they now have stockpiled production available, with Rio Tinto saying it intended to use this to boost exports.
What remains abundantly clear from the production reports is that the world’s big three iron ore companies are producing at record levels and remain committed to mining more.
EXPANSIONS STILL COMING
Even BHP Billiton’s much-reported cutting of capital expenditure and deferral of the expansion at its Port Hedland facilities in Western Australia state comes with a caveat.
The company still intends to boost output to 270 million tonnes by 2017.
In effect, the iron ore price rallied on news that one major miner would only be adding an additional 20 million tonnes over the next two years instead of the originally mooted 40 million tonnes.
If that sounds ridiculous, bear in mind that the expansion plans of Rio Tinto, Vale and fourth-ranked Fortescue Metals Group remain on track.
Also coming to market later this year is the new 56-million tonne a year Roy Hill mine in Western Australia, while Anglo American’s 26.5-million tonne a year Minas Rio project in Brazil has started shipping cargoes.
All this new iron ore is trying to find its way into top buyer China, where crude steel output dropped 1.2 percent in March from a year earlier to 69.48 million tonnes.
The World Steel Association said on Monday that demand in China will drop in 2015, albeit only by 0.5 percent to 707.2 million tonnes.
This echoes the view of the China Iron & Steel Association, which said the country has already reached “peak steel” and demand is likely to ease in the next few years.
On the bullish side for iron ore miners are hopes that the Chinese authorities will keep stimulating the economy through infrastructure spending, adding to the recent monetary easing.
There are also increasing signs that Chinese domestic iron ore miners are idling more output amid the price rout, thus opening the way for cheaper imports.
However, imports can only displace domestic output for as long as they remain cheap, with any sustained rally likely to tempt production back into the market.
Overall, the reasons to be bearish on iron ore well outweigh the reasons to be bullish, thus making it likely that any rallies, or price spikes higher, will prove temporary.