Spot iron ore prices are lower than the depths seen in the first part of the global coronavirus pandemic last year, and market dynamics are yet to signal any rebound in the largest importer, China.
An indication of the state of the market in the past has been the differences between the various grades of steelmaking materials.
In times of strong demand, low grade 58% iron ore tends to outperform both 62% and high grade 65% iron ore.
This is because steel mills in China, which buy almost 70% of the global seaborne iron ore, are trying to produce as much steel as possible by operating their plants at high capacity utilization levels.
However, when steel demand weakens, as is the case now, mills tend to use higher grades of iron ore to maximize the amount of steel produced from as little raw inputs as possible.
Amid domestic coal shortages ahead of the northern winter, the current pressure to save energy in China means that steelmakers will try to produce as much steel as possible while conserving energy.
This dynamic is reflected in current spot prices, with 65% ore outperforming lower grade material, but prices in all three major grades have declined since record levels reached in May.
High-grade 65% iron ore, as assessed by commodity price reporting agency Argus, closed at $111.35 a tonne on Monday, down 58.1% from its all-time high of $265.80 on May 12.
62% grade finished at $93.55, down 60.3 percent from the high of $235.55 on May 12, while 58% ore finished at $66.40, down 67.9 percent from $207.10.
As iron ore prices started to rise from coronavirus lows as China increased stimulus spending to stimulate the economy, it was the better-performing 58% grade.
From its 2020 low of $68.25 per tonne, it jumped 203.4 percent to its May high this year, with grade 62% gaining 196% and ore up 65% by 181.3%.
Therefore, it would be reasonable to assume that an indication of when the worst has passed for spot iron ore prices will be when the lower grade once again performs relatively better than 65% ore.
What are the expectations in steel?
This is unlikely to happen until Chinese steelmakers are allowed to maximize production once again, as was the case in the first half of 2021, when record high production figures for several months were reached.
Given that the energy crisis in China is not quite over and there is also official pressure to limit air pollution throughout the winter and ahead of the Winter Olympics in Beijing in February, it may take some time before steel production returns to potential.
China's daily steel production in September was 2.46 million tons per day in 2020, the lowest since December 2018, down 21.2 percent from the same month.
Preliminary reports suggest that October's steel output may even be lower than in September as the industry considers the official target to limit annual output to a record 1.06 billion tons year-on-year.
According to official data, production in the first nine months amounted to 805.89 million tons, an increase of 2% compared to the same period of the previous year.
While China's manufacturing sector contracted for the second month in October, according to the official Purchasing Managers' Index, which signals a decline for steel demand, there are also questions about the resilience of the construction sector in the world's second largest economy.
Overall, there is little to suggest that China's iron ore demand will recover in the coming months. Such a development will likely occur in the first quarter of next year, which assumes an improvement in the economy.
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