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Iron ore sees sharpest weekly decline in more than 4 years

Greenhouse gas and gold mines Nearly 1 ton of CO2 emitted per ounce of gold produced in 2019

Essential Metals & Mining Insights - September 2020

Essential Metals & Mining Insights - August 2020

State of the Market: Mining Q2-2020


Iron ore sees sharpest weekly decline in more than 4 years

Minedcommodities saw a sharp dropin the week to May 6 as disappointing jobs data came through in the U.S. Despitea weakening of the U.S. dollar, it was a bad week for metals, with only gold improvingamongst the major metals.

Bulk

Ironore (62% Fe material) was the worst performer in the five days to May 6, finishingthe last day of trading alone with a 3% slide to a closing price of US$57.70 per tonne. Overall, themetal recorded an 11.8% slide, making it the most devastating week in 4.5 years.

Despitethis enormous slump, the ore still keeps up well year-to-date with gains of some34% and an average price of more than US$51 per tonne.

Manyforecasters have corrected their numbers upwards in light of the rally seen so farthis year.

GoldmanSachs, for example, has nearly doubled its second-quarter price estimates to US$55per tonne and raised third- and fourth-quarter prices to US$45 per tonne and US$40per tonne, respectively.

Bernsteinanalysts also noted that iron ore continues to show a strong performance, despiteweakness seen in recent days.

"Theiron ore price pulled back to US$60 per tonne this week but still remains far higherthan the US$39 per tonne seen towards the end of last year," the analysts commentedMay 5.

"Wecontinue to think that this robustness has been caused by a combination of factorson both the demand and supply side. We have seen emerging signs of a recovery inChina, with property prices increasing, higher PMI, PPI and a renewed credit boom.

"Onthe supply side we have seen the majors pull in their supply guidance for this year."

Accordingto Bernstein, second-quarter shipments of iron ore have accelerated as annualizedsales have jumped 4.8% quarter on quarter and 6.9% year over year. Quarter-to-dateshipments were also up by 13.0% year over year. However, Bernstein flagged thatthese increases were somewhat expected due to seasonal sales factors and supplyincreases planned by iron ore majors.

In thefirst quarter, shipments from major producers had dropped 8.1% quarter over quarterto 271.1 million tonnes of ore. Nonetheless, year over year this represented a surgeof 10.2%.

Bernsteincommented, "The drop from the Q4 levels is not surprising as exports tend tobe weaker in the first three months of the year due to a slowdown in the Chineseconstruction cycle and the Chinese New Year holidays, as well as seasonal weatherfactors impacting production."

So far,iron ore has recovered 55% from its nine-year low reached at the end of 2015.

The goodperformance at the beginning of this year has taken many analysts by surprise. Initially,many had tipped the ore to finish 2016 as low as US$35 per tonne, mainly on theback of oversupply concerns.

But additionalstimulus in China translated into higher steel consumption as China's real estatesector was revived. Global output cuts and disruptions at mines and ports also contributedto souring prices for iron ore.

Nonetheless,many market observers remain skeptical and argue that the bull run might eventuallycome to a sharp end once oversupply issues catch up with the sector. Higher pricescurrently allow marginal producers to stay in the running and further feed stockpiles. However, any change in demand could result in oversupply pressuring pricesagain.

In fact,data for April indicated that China's iron ore imports are slowing, despite a 4.6%pick-up to 83.9 million tonnes year over year. Compared to March, however, theyfell 2.2%. April steel imports by India fell 15.5% year over year to 654,000 tonnes.

Precious

The fallingU.S. dollar helped gold shift upwards last week, rising 2.6% over the week to US$1,289per ounce.

Despitethe ongoing uplift in price for the precious metal — it gained 22% in the firstquarter alone — hopes are rather light that it will get anywhere close the US$1,922per ounce mark hit in 2011.

Accordingto Sharps Pixley CEO Ross Norman, gold will only be sent on a sustained rally ifmore "physical players" join the game and convince institutional investorsthat it "really is an alternative to more traditional asset classes."

"Thiscould then bring about the price elasticity — or buying on higher prices — thattypified the last bull run. Or equally perhaps physical buyers do not turn up tothe party in which case the speculators — sometimes described as behaving like 11year olds high on e-numbers — could get bored and as easily reverse their positions,"Norman noted in a May 5 blog post.

Eventhough gold has seen an "exceptional gain" in the year to date, Normansaid a vulnerable macroeconomic outlook had led to very similar behavior in thefirst quarters of 2014 and 2015 before momentum fade set.

However,Norman believes that the viable factors this year are different as the buyers marketshave shifted from East to West in what he called a question of "motivation,form and tenure."

He said,"The correction lower from all time highs at $1922 in 2011 were driven by sellingacross the spectrum of the gold community in the West. European Central banks hadalready disgorged sizable chunks of metal under the Washington Accord and then itwas institutional investors selling of ETFs (roughly 1000 tonnes), coupled by speculatorson COMEX who sold their long futures positions and the market went into a rare netshort position — and then there was cash-for-gold at the retail end — not in itselfsignificant in size, but it underscored the West falling out of love with gold andcashing it in to sustain the consumption binge of the early 2000's."

"Neverbefore was there such an epic movement of bullion from West to East in exchangefor fripperies since the days of Marco Polo and the silk road."

Meanwhile,new data emerged that suggested China and Russia have accounted for 85% of centralbank gold buying over the last two years in a bid to diversify their reserves. Chinabought 1,084 tonnes over the last two years, while Russia's order book comprised1,280 tonnes.

Specialty

The diamondmarket saw a number of highlights in the week to May 6, starting with the announcedauction of the largest gem-quality rough diamond discovered in more than 100 years, which will take placeat Sotheby's in London at the end of June. The Lesedi la Rona, which was unearthedat Lucara Diamond Corp.'sKarowe mine in Botswanain November 2015, is thought to fetch at least US$70 million.

The auctioncould drive the company's sales record up to more than US$130 million in just acouple of months, given that Lucara cashed in on more than US$63 million earlier this week, after an 812.77-caratdiamond from Karowe changed hands. The price was the highest ever achieved for thesale of a rough diamond.

's pink diamonds divisionalso announced that itwill tender a rare gemstone, a 2.83-carat polished oval shaped diamond, known asthe Argyle Violet. It is the largest violet diamond ever recovered from the company'sArgyle mine in WesternAustralia.

Moody'sflagged in a May 4 note that the price of diamonds is very hard to predict as itis not driven by normal industrial supply and demand factors.

Meanwhile,the Singapore Diamond Investment Exchange, or SDiX, seeks to standardize globaldiamonds trading as an asset class and on May 5 launched the world's first commodityexchange for physically settled diamonds. Accredited investors will be able to tradediamonds on the platform, which aims at creating a benchmark price to value diamondsas an asset class. So far, the market comprised bilateral physical marketplaces,with little transparency around pricing.

Base metals

Weekon week the three-month price of nickel slumped 4.9% to US$9,025 per tonne, andzinc slipped 3.6% to US$1,874 per tonne.

The LondonMetal Exchange's three-month contract for copper on May 6 closed 5.2% lower thana week earlier at US$4,790 per tonne in what was the biggest weekly drop in nearlysix months.