The nascent iron ore swaps market implies that iron ore prices could stay elevated for the foreseeable future, as per recent data from ICAP. Most recently China-related prices have surged to new highs.

This is good news for major ore producers such as Vale, Rio Tinto, and BHP, and not so good news for Chinese steelmakers.

The Steel Index daily iron ore price reference price reached US$104.1
per dry metric tonne on Friday. The price, published daily for 62% Fe
content fines delivered China, and has surged upward, increasing by
5.0% on yesterday and 9.2% over the week. This is the highest level
since the index was first published on 17th November 2008.

Yet despite this rather bullish outlook for the iron ore market, the
media-darling Baltic Dry Index, an index for ships which carry bulk
commodities such as iron ore, lost almost a fifth of its value in just
the last week. And freight-forward agreements (FFA’s) point to a 19%
decline in bulk rates by year-end.

“The Chinese have backed off and it’s starting to show in the number of
shipments this month,” Gavin Durrell, a Cape Town-based official at
Island View Shipping SA, Africa’s biggest commodities shipping line,
said by phone today. “Iron ore and coal seem to be slowing down.” …
Derivatives betting on the Baltic Exchange’s future assessments fell
for a third day, indicating the declining spot market is causing
traders’ future expectations to deteriorate.

While at first blush a negative shipping market seems at odds with a
positive ore market, there is a reason why iron ore prices could remain
strong even while the rates to ship iron ore and other dry bulk
commodities continue to fall. This is because the larger concern for
the dry bulk market currently is in regards to oversupply of new ships
coming online due to new deliveries rather than a drop in long-term
iron ore demand growth.

So while A) lower dry bulk rates implied by FFA’s should be at least
noted and B) iron ore swaps should be taken with a grain of salt given
that they are relatively new, falling dry bulk rates still shouldn’t be
of overwhelming concern to those who are bullish on the base metal.

In fact, cheaper ore shipping, caused by over-supply of ships rather
than lack of ore demand, could nicely make the all-in cost of ore
lower, all else being equal. And in fact, while dry bulk shippers may
be headed for stormy seas, the long-term argument for upward commodity
price pressure remains very much intact.

…barring economic disaster in large emerging markets, an army of
consumers competing for raw materials will continue to emerge. Residual
hopes of simply reverting to previous consumption patterns in the U.S.
are misguided. Another bout of price spikes will focus minds eventually.

Source: Business Insider

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