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Iron ore in a flurry of volatility as Bernstein flags falling Chinese output

Global markets were again caught up in what U.S. President Donald Trump was tweeting last week.

On May 23 his tweet made it appear he had walked away from a recent trade agreement with China, as he felt the heat from trade hawks in his supporter base.

In what Australian corporate advisory Patersons called a "vague" tweet, Trump said: “Our trade deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion.”

Geopolitical worries also again grabbed commodities' investors’ attention. On May 24, BBC reported senior North Korean official Choe Son-hui as saying the North would not "beg" for dialogue and warned of a "nuclear showdown" if diplomacy failed, after both sides had said over preceding days that the June 12 summit between the two countries' leaders could be delayed or even called off.

Price ring

The spot price for benchmark 62% fines iron ore fell 3.7% to US$63.94/tonne on May 25, reversing all of the previous day's gain when it surged 3.5% to US$65.54/tonne on May 24.

Meanwhile, most base metals were lower in May 25 LME trading from the previous day, headed by more than 1% drops in aluminum, lead and tin prices.

Aluminum closed at US$2,280/t, down from US$2,327/t a week prior. Copper finished on US$6,884/t, lead US$2,464/t, nickel US$14,830/t, tin US$20,425/t and zinc US$3,047/t.

Having risen from US$1,290.30 per ounce to US$1304.80 from May 23 to May 24, LME Gold dipped slightly to US$1,303.90 by close of trading on May 25.

Talking points

AllianceBernstein said new data from academic literature within China on the extent and quality of its iron ore endowment backs the firm's theory of the "inevitable" closure of the country's iron ore production, which would have a greater impact on the global iron ore market than Saudi Arabia ceasing oil production would have on oil prices.

Bernstein said in a May 22 note that the new data, based on an analysis of the roughly 2,000 identified iron ore deposits in China, confirmed the firm's own appraisal of the situation and hence on the quantity of iron ore mined in-country.

The firm said that while China's run-of-mine material is well understood, less so is the grade of that material, particularly given the conventional mechanism by which grade data is calculated leads to the "absurd conclusion" that there have been negative ore grades, which is "clearly impossible."

Bernstein's alternative interpretation that it believes leads to a "far more plausible outcome" and which explains several apparent inconsistencies in the data on China's steel industry suggests China's position as the world's largest producer on a run-of-mine basis also translates into the same position on a rich-ore-equivalent basis.

Likening China's importance to iron ore prices to that of Chile to copper, the firm added: "While we believe that Chile will probably be able to keep its production of copper at current levels, China will almost certainly not manage to do the same with iron ore."

The global investment management firm showed in a previous note on May 1 that Chinese investment in its domestic iron ore industry will continue to shrink as long as profitability is less than 148 Chinese yuan/tonne, which at current cost levels is equivalent to a benchmark iron ore price of about US$89/tonne.

Bernstein believes iron ore is leaving the market "in much greater volume each year than anyone has realized to now", thus greenfield investment in iron ore will be needed "sooner than anyone realizes as well."

Financings

In one of the more innovative moves last week, Cobalt 27 Capital Corp. announced May 22 that it had agreed to the world’s first cobalt-nickel streaming finance deal on a producing mine.

Cobalt 27 said it had reached a US$113 million deal to buy a US$113 million nickel-cobalt stream from Highlands Pacific Ltd., while investing A$15 million in the junior base metals producer in what it called a first in the mining industry.

One of the biggest financings of last week was Israel Chemicals Ltd. pricing a debt offering of US$600 million in senior unsecured notes due 2038 with interest set at 6.375%, with the proceeds set to replenish cash or debt used to repurchase its 4.5% notes due 2024. The offering should close May 31.

Nemaska Lithium Inc. said May 22 that it intended to raise C$360 million to complete the C$1.10 billion funding package for the construction, commissioning, working capital and reserves of the Whabouchi lithium project in Quebec.

Hallador Energy Co. said May 21 that it had secured a C$267 million credit agreement with the term extended through May 2022, comprised of a C$147 million term loan and a $120 million revolver.

Shares in Petra Diamonds Ltd. fell May 24 after it announced plans to raise up to US$178 million through a 5-for-8 fully underwritten rights issue to cut its debt and for working capital. The company said it would issue 332,821,725 shares at 40 pence each, 36 pence below the stock's closing level May 23. Shares were down 16% in midday London deals on May 24.

As of May 25, US$1 was equivalent to 6.39 Chinese yuan.