CRU: Iron ore firms on surging costs

Written by Liz Gao

This item was first published by CRU. To learn about CRU’s global commodities research and analysis services, visit www.crugroup.com.

After a brief dip last month, iron ore prices have resumed their upward trajectory as the war in the Middle East escalates. Elevated costs have established a new pricing norm, keeping iron ore prices firm even as current levels exceed what supply‑demand balance would justify. Meanwhile, Simandou is finally gaining momentum after a slow start. Quality remains the decisive factor for steelmakers sourcing from the seaborne market, reshaping trade flows.

Conflict escalation keeps iron ore prices firm

After a fragile peace agreement, the Middle East conflict has escalated once again. Market contacts indicate GCC producers now expect the conflict to be prolonged, keeping crude oil on an upward trajectory. Higher bunker fuel has pushed Brazil–China freight costs to a new year-to-date high near $40 per wet metric ton (wmt), squeezing junior miners in Brazil close to their cut‑off line. Meanwhile, high bunker costs have forced vessels to adopt slow steaming to save fuel. The reduced sailing speed has tightened available tonnage in the market, further driving freight rates higher. Major miners in Brazil remain more resilient, though Vale has reportedly shipped significant volumes of low‑grade material from its own supply, reducing third‑party procurement. With freight a key component of CFR iron ore pricing, the escalation of war continues to anchor iron ore in its new norm, range‑bound around $110 per dry metric ton (dmt).

Simandou gathering pace

Simandou has finally gained momentum, with shipments reaching record highs since commencement. After surpassing 1 million metric tons (mt) in April, volumes are now approaching 2 million mt in May, which we believe reflects frontloading ahead of Guinea’s wet season (May–September), when rainfall is nearly double that of São Luís. Risks loom as none of the shareholders have experience managing heavy rainfall, and high moisture levels will complicate loading operations. While excessive supply adds downside pressure to an already oversupplied market, stronger tonnage demand from the Atlantic has lifted freight rates, providing cost support that keeps iron ore prices elevated.

Indian imports on the rise

In April, India’s iron ore imports surged 110% y/y to 1.2 Mt, up 6% m/m. We do not expect this pace to be sustained, as import competitiveness has eroded in recent months with high seaborne prices and a weaker rupee. Indian imports are largely arbitrage‑driven, rising when seaborne prices offer better value. With domestic production costs trending higher, we believe imports will show a gradual upward trajectory in the longer term. Value‑in‑use remains a key factor: domestic ore’s high alumina content has pushed steelmakers toward lower‑alumina alternatives, with BRBF favoured for its higher VIU. Discounts on Australian cargoes, stemming from geopolitical tensions with China, have also supported Indian imports. That said, short‑term momentum is unlikely to persist, as current seaborne prices remain high.

Though India shows strong momentum, it is difficult to shift the overall picture as China remains the dominant force in iron ore demand. Over the past month, Chinese consumption is estimated to have risen 1.6% m/m, with steelmakers continuing to procure as needed. Port inventories are trending lower, but the pace of decline is slow and mid‑May volumes remain more than 16% higher y/y. This higher consumption has lent support to iron ore prices, yet elevated inventories continue to pose challenges for future price trends. Once the war ends, the removal of cost support and high port inventories in China could expose the 62% index to significant downside risk.