In November last year, we looked at the Baltic Exchange Dry Index (BDI), and flagged how this key indicator was pointing to a slump in iron ore prices.
The BDI is a shipping and trade index that tracks the change in cost of transporting a range of commodities.
It calculates the changes based on a range of ship sizes and routes around the world.
Well that slump came to pass as the BDI hit a trough on 19 November, and iron ore prices crashed a week later.
For reference, here are the two charts, with our chart from November on top:
Source: Bloomberg, Business Insider
So let’s have a look at what the BDI is doing now:
So as you can see, we have had a revival over the past month and a half followed by a more recent downward trend.
Assuming the same lag time of a week, the same slump could occur again, though this time smaller.
Iron ore prices firm…for now
At the moment however, iron ore prices are firm, with Business Insider reporting the following:
‘The price for benchmark 62% fines rose 0.5% to $73.80 a tonne, pushing back towards the multi-week high of $74.46 a tonne struck on January 8…the price for 58% fines jumping 1.2% to $48.33 a tonne, leaving it at the highest level since September 5, 2017 [and] the price for 65% Brazilian fines held steady at $88.20 a tonne for a third consecutive session.’
This spot price activity is down to declining steel margins, as lower grades are cheaper, despite causing more pollution.
The higher grades may come back into vogue as the article, citing a CommBank analyst, suggests there is still ‘structural’ demand.
Vivek Dhar, the analyst, continues:
‘Steel margins remain the critical driver of iron ore prices and China’s preference for higher grade ore. With steel margins still subdued, we see downside risks to iron ore prices.’
Direction of iron ore could cut two ways
So in this case the iron ore market could cut one of two ways. The BDI could be signalling a fall-off in prices as margins decline. At the same time, Chinese Premier Li Keqiang has hinted at stimulus with the need to stay on target, according to Reuters:
‘We should strive for a good start in the first quarter to create conditions for completing the key full-year development targets and tasks.’
The key words here being, ‘to create,’ as in a verb, suggesting something will be done.
As it stands, this writer expects iron ore to potentially face headwinds as the BDI indicates in the short-term. The window for this could be a week, perhaps two.
Following this, we will be looking to Chinese media for further updates on smog alerts, production curbs and more importantly, firmer details regarding stimulus.
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