High iron ore prices this year have been a function of strong steel prices and any weakening in the latter will likely dampen the benchmark raw material, Barclays Capital said in a note Wednesday.
S&P Global Platts 62% Fe IODEX has averaged $73.74/dry mt CFR over the year to August 12, surprising some with its upside; over the same period of last year the headline iron ore price averaged $54.12/dmt CFR.
The recent build in steel stocks, which have risen nearly 3% so far this month to 992,000 mt as of Friday, could pressure steel prices, filtering into a softer iron ore market, the bank said.
"Given the fact that steel prices have driven iron ore prices throughout 2017, a weakening in benchmark rebar and HRC prices will feed through to switch over lower quality iron ore consumption, relieving the upward pressure on the iron ore price," it said.
China's recent drawdown of portside iron ore stocks, primarily consisting of lower- and some medium-grade material, could be testimony to mills switching their focus away from higher grades that drive furnace productivity.
Port stocks of iron ore have fallen to 134 million mt, down from a zenith of 145 million mt in mid-June, Barclays said.
"As soon as steel prices revert [as in Q2], marginal steel mills within China will likely switch back to lower quality iron ores, reducing the quality premium and sending the benchmark 62% Fe price lower," it said.
Spot prices of Q235 hot rolled coil in Shanghai slipped from Yuan 4,335/mt ($663.72/mt) on September 4 to Yuan 4,225/mt Tuesday.
Spot rebar prices also slipped, but to a lesser extent -- HRB400 grade rebar eased back from Yuan 4,170/mt on September 4 to Yuan 4,130/mt over the same period.
