Iron ore could take on role as economic indicator, rivaling copper: panel

London — Iron ore -- the second-biggest commodity after crude oil in both weight and value -- could take on a role as a global economic proxy indicator to rival copper, panelists on an iron ore webinar organized by S&P Global Platts said Dec. 3. This is due to a boom in investor interest in the steelmaking raw material, and its links with industrial and economic cycles, particularly in China, the world's biggest consumer, they said.

"Iron ore is intimately linked to Chinese economic cycles... stimulus and infrastructure developments and perhaps could be on a par or even better than copper as a global economic macro proxy going forward," said Jin Yu Cheong, director of commodities, Singapore Exchange SGX, on the webinar examining iron ore's role as the newest mega-commodity. "In 2020, the Chinese economy is probably doing the best globally -- China may become the main engine of global growth and iron ore is that proxy for its growth," he said, expressing his personal opinion.

The price for iron ore Fe 62% fines delivered to China leapt to $145.30/mt Dec. 4, according to S&P Global Platts assessment, up $7.50/mt on the day and its highest in more than seven years, on tight supplies and rising crude steel production in China and globally as government stimulus worldwide backs an infrastructure-led economic recovery from a coronavirus-induced slump earlier this year. Iron ore's prices are up 56% in the year to date -- compared with around 24% for copper -- and it is recognized by some as 2020's best performing commodity.

Iron ore had 35% annualized volatility last year, dropping to 30% this year. It has a correlation of around 80% to steel rebar and gold prices and correlation of close to 90% with the China A50 stock market index, Cheong said.

Kerry Deal, head of business development at Freight Investor Services, and Fiona Boal, head of commodities and real assets at S&P Dow Jones Indices, echoed the view that iron ore could become a macro indicator, as its performance has become increasingly aligned with economic developments and other commodities this year.

Iron ore's "spectacular performance" as an asset this year, coupled with its increasing financialization, had led it to be viewed as a safe haven and indicator of event risk, alongside gold, and it could eventually be included in a broader headline commodities index, Boal said.

"In only 10 years the market has grown from being very opaque with annual contract negotiations... to a global financial commodity that regularly graces the front page of the financial press," she said.

Copper traditionally has a place as a barometer of economic health as it has been greatly used in western world development, while China's development has been more infrastructure-based, using rebars and other steel products, hence its strong links to iron ore, Cheong said.

Market still immature

Close to 1.5 billion mt of iron ore is traded annually on seaborne markets, in a total market estimated to be worth around $300 billion. However, this huge physical market is still considered to be at an early stage of maturity: spot pricing came to this market only about 10 years ago -- following 40 years of annual contract negotiations or "mating" between large miners and large steelmakers.

Cheong noted that with the increasing presence of financial players in the iron ore market, derivatives volumes now exceed physical market volumes, with some 2.2 billion mt iron ore derivatives set to be traded this year on the SGX alone, just over 10 years after launch, and with prospects for further growth.

Steelmakers represent just 10% of the iron ore hedging market, Deal told the webinar. However, in line with the trend for mills to strike index-linked contracts with customers, more European mills, including German mills, are starting to look at iron ore hedging, he said.

Joel Parsons, portfolio manager of Drakewood Capital Management, active in metals futures, noted that even if steelmakers and miners don't actually hedge, they are now constantly looking at values on iron ore futures markets to help them make decisions.

Supply and demand dynamics

Still, iron ore is a market very much driven by physical supply and demand, with prices essentially established by China macroeconomics and how much steelmakers in China can sell their products for, Parsons said.

Reactions to miner Vale's announcement Dec. 2 of 2020 production at 300 million-305 million mt, 5% below previous guidance, and with 2021 estimates around 25 million mt below expectations at 315 million-335 million mt, illustrate the sensitivity of supply-demand dynamics. Analysts at Jefferies International promptly raised their average price expectation for next year to $110/mt from the previous $105/mt, saying "we continue to believe a price spike of $150+ in Jan/Feb is coming due to seasonal factors."

RBC Capital Markets now sees a 2% deficit in iron ore markets for 2021, following October's "astonishing" steel production growth rates in China, with the market to stay in a "very tight position for at least another six months," and likely to drive consensus prices higher.

Commonwealth Bank of Australia noted seaborne supply from Australia dipped about 6% from a year previously in the four weeks to Nov. 27, while China's iron ore stockpiles slipped for two consecutive weeks.

"China's steel demand remains the most pivotal driver of iron ore prices," Commonwealth analysts said, noting that China's "impressive" economic recovery from the coronavirus pandemic means China took 76% of the world's seaborne imports in the first nine months of 2019, up from its usual 70%.

However, Commonwealth concurs with others that a price decline will come next year. "The recent surge in iron ore prices to multi-year highs suggest that prices are more likely to decline from here over the next 12 months," it said. "China's demand impulse should eventually weaken at some point next year, especially as China's fiscal policy will likely move away from supporting China's commodity intensive sectors."