Any Old Iron

Intermediate
  • Iron Ore Fines spent the last month rotating in an impulsive channel
  • There is disruption to shipments from Brazil
  • Chinese mills are at over 90% capacity and growth plans are ambitious
  • Prices are going to rise early in the week and a break over USD200/Tonne is seen

If one looks at the One-Month chart, shown below in Figure 1, one can see the spot price of Iron Ore Fines has shown healthy rotation in a fledgling impulsive channel. If one looks at the Time Technicals, it looks like prices will only move higher in the next month, however, will such a buoyant outlook persist?

Iron Ore Fines Chart
Figure 1: Iron Ore 62% Fe One-Month Chart (USD/Tonne) and Time Technicals Source: www.investing.com, Spotlight Ideas

What is behind this short-term encouraging outlook?

Iron ore prices bounced back during February as demand remained positive in China’s steel sector as data from Fastmarkets MB suggested capacity utilization rates at 247 furnaces across China rose to 92.19% in February from 90.94% before the Chinese New Year holiday on February 12.

There has also been an increase in concern over the reliability of Brazilian shipments according to Brazilian XP Investimentos. They reported Brazilian shipments falling 8% at the end of February after disruptive rainfall in the north.

“…High rain volumes at major ports will continue to represent a challenge for Brazilian players during Q1. So far, Brazil is running below guidance…”

Ponta da Madeira is one of Vale’s principal assets and arguable the most important iron ore and manganese loading terminals in the world. At the end of February it registered a decrease of 38% in shipments on a week-on-week basis to 2,404 tonnes.

This follows a fire that ruined Pier 4S at this facility in January. This will take several months to repair and bring the terminal back to full capacity.

Iron Ore Regions of Brazil
Figure 2: Iron Ore Regions of Brazil Source: Spotlight Ideas

In terms of the weather outlook the Brazilian National Meteorological Institute (INMET)  said there is a shift in the precipitation pattern in South America as wetter trends shift to the north of Brazil.

Chinese growth targets trump emission restrictions

Iron ore prices declined on Friday March 5 due to weak iron ore demand amid the strict emissions restrictions and further air pollution control plans. However, I think we need to look at the statements from the Chinese government re economic growth to assess where iron ore prices will go.

China’s government announced on Friday a 6% growth target for 2021 and unveiled a five-year plan and vision for 2035 that aims to expand China’s global footprint as a leading technology power.

The plans were unveiled at the opening of the annual week-long convening of the Communist Party controlled legislature, the National People’s Congress (NPC). They outlined plans to consolidate the positions of China’s supply chains in key strategic industries and to increase China’s spending on research and development (R&D) to achieve self-reliance in key high-tech sectors.

Chinese Premier and second in command, Li Keqiang outlined as two major economic targets for 2021 a GDP growth of over 6% and the creation of over 11 million new urban jobs. The target implies and an expectation of continued economic revival in China. The economy contracted in Q1 2020 because of the COVID-19 pandemic but recovered to grow 2.3% in 2020, the only major economy to avoid a contraction.

The Five-Year Plan (FYP) for 2025 for the first time did not mention annual growth targets, instead announcing an ambitious annual target to increase R&D spending “by more than 7% per year”. The NPC will also approve a plan for “long range objectives through the year 2035”.

Figure 3: Iron Ore Fines 62% 12-Month Chart (USD/Tonne) Source: www.investing.com , Spotlight Ideas

Using the past 12-Month chart we can see that the spot price has decided to take a momentary pause at the 175.76 level. The momentum is such that with the disruptions in supply flow from Brazil I would expect another push higher to test 190.19 before pressing even higher to break the 200 level with my main objective set at a 38.2% extension of the 12-month range to 206.34. I am taking a long view here and will set a deep stop at 145.40.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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