Key commodities such as iron ore, steel and copper have witnessed volatile movements over the last couple of weeks, but their prices are expected to stabilise during the remainder of the year, say analyst firms tracking the markets.
Over the past month, copper prices have declined by over five per cent, steel prices by almost 10 per cent, and iron ore by over 25 per cent.
The drop in the prices of these commodities has followed a sustained rally in the first half, which saw copper, iron ore and steel soaring to record highs. But rating agency Fitch Solutions Country Risk and Industry Research (FSCRIR) said it holds its view on the prices of these commodities stabilising for the remaining part of this year.
Iron ore to ease more
“ ... iron ore prices have weakened substantially in past weeks, as per our expectations. While we expect further easing of iron ore prices, we believe most of the collapse is now behind us,” said Fitch Solutions.
Iron ore prices (of 63.5 per cent ferrous content) were quoted at $151 a tonne for delivery at Tianjin port, China, on Friday, said the Trading Economics website. In May this year, the rates hit $239 a tonne. On Singapore Exchange Limited (SGX), iron ore with 62 per cent ferrous content was quoted at $154.40 a tonne cost and freight China.
“Iron ore supply from global producers in the second half of this year and 2022 will be higher than 2020 and the first half of this year, while demand from Chinese steel producers has started to slow,” said FSCRIR.
Chinese data risk
Dutch multinational investment bank ING’s economist think-tank ING Think said iron ore’s rout has continued with prices on SGX dropping below $160 a tonne.
“The recent economic data from China heightened the risk of weaker demand for the rest of the year. There have been growing expectations towards stricter enforcement of production curbs, resulting in deeper cuts in crude steel. This would weigh heavily on iron ore demand,” said ING Think.
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Fitch Solutions said that the iron ore market had factored in increased supply and other issues, and the commodity will average $170 a tonne this year and $130 next year. ING Think said iron ore prices could fall again as they are still above their 2020 average.
US steel prices soar
Steel prices have headed south in line with the fall in iron ore prices. Prices have recovered this week a tad after dropping below $775 a tonne in China. Currently, prices have recovered to $783.28 a tonne, though they are far below the May peak of $956.04 a tonne.
Fitch Solutions said steel prices have begun stabilising across the world barring the US. Steel prices in the US have soared to record highs over the last few months with the rates scaling a new peak this month.
FSCRIR said global steel prices would average $920 a tonne this year and drop to $750 next year.
“A long standing mismatch between supply and demand last year, and the first half of this year has seen average global steel prices soar to levels last seen in mid-2008,” it said, adding that its forecast for prices to start cooling in the second half of the year has started to play out.
Drop in China output
Global prices have begun to drop after data showed a decline in Chinese production. According to the World Steel Organisation, Chinese steel output dropped 8.4 per cent in July to 86.8 mt, compared with the same period a year ago.
ING Think said Chinese National Bureau of Statistics (NBS) data also reflected the fall in July production. The Dutch multinational bank’s economic think-tank said that Chinese steel imports also dropped 60 per cent year-on-year, strengthening the downtrend.
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Fitch Solutions said it does not anticipate “a significant reduction in average price levels or a collapse. This is due to buoyant global demand despite steady production levels, and an extension in the US price rally that will pull up the global average”.
A general slowdown in Chinese consumption is expected as construction activity in the Communist nation had likely peaked in the first half this year, said the agency.
Copper range-bound
Though copper has witnessed volatile trading over the last few weeks, its prices are expected to trade within the $8,500-9,500 a tonne range.
On Thursday, three-month copper contracts on the London Metal Exchange closed at $9,315.50 a tonne, while the metal was available for cash at $9,323. On May 7 this year, copper had peaked to a record $10,724.5 a tonne for cash and $10,720 for the three-month contract.
FSCRIR said copper prices would average $8,700 a tonne this year before dropping to $8,370 next year. But prices will be significantly higher than pre-Covid levels in the coming years.
Beginning of the end of commodity rally?
ING Think said China’s NBS data showed that China’s refined copper output rose by 10.4 per cent year-on-year to 8,46,000 tonne in July. On Thursday, it said the red metal witnessed a spike in cancelled warrants on the LME, leaving them at 84,500 tonnes.
This is the highest level since July last year, signalling potential outflows of copper. But the market has ignored the development with the three-month contract slipping below $9,300 before recovering.
Mining workers’ unrest
Copper supply is being threatened by mining unions’ unrest in Chile where workers have rejected the latest wage hike proposal. The strike is continuing for the third week at Caserones mine, which produced about 1,27,000 tonnes of copper last year. A mine in El Salvador, and another Chile mine – Cerro Colorado of BHP – are also facing similar wage problems.
Fitch Solutions said the negative correlation between copper and the US dollar has strengthened, reaching levels last seen during the 2012 recession. This could put more downside pressure on the red metal prices.
The rating agency sees copper supplies improving from Chile and Peru, while Chinese demand could slow, stopping copper from rising to levels seen in May this year.
The commodity markets faced the risk of slowdown in the momentum of global economic growth and the Delta variant spreading rapidly across the globe.
Movement of key commodities (in %age) Source: Trading Economics