The spot iron ore market declined Thursday as steel overcapacity and poorer margins negatively affected end-user demand for seaborne cargoes.
Platts assessed the 62% Fe Iron Ore Index $2 lower on the day at $125.50/dry mt CFR North China.
The steel supply overhang was a prevailing challenge for steel prices and margins, as overcapacity did not appear to ease. Market participants said this was a key reason for the prudent attitude steelmakers were adopting toward spot procurement of seaborne iron ore.
"Unless steel production levels are reduced, both the steel and iron ore markets cannot recover," a Shandong-based trader said. "But so far we are not hearing of many mills who have concrete plans for output cuts."
China's average daily crude steel output for the month of April hit 2.1883 million mt/day, exceeding by 2.3% the average daily crude steel production levels for March, which weighed in at 2.1387 million mt/day, according to data from the Chinese National Bureau of Statistics.
"Steel production levels are surprisingly, still rising despite downstream demand being pretty poor," a source at a Chinese state-owned trading house said. "More and more mills have been made to adjust their selling prices of steel material downward because of that. This is bad news for iron ore demand as well as they're trying to keep ore inventories as low as they can."
A Zhejiang-based mill source said that smaller mills were keeping on average 10-15 days' worth of ore, mid-sized plants were maintaining levels at about a month's worth, while the biggest mills had about 45 days' worth of stock at their facilities.
"Nobody dares to keep more than 45 days' worth of iron ore in their inventories as downstream demand for steel is really bad," the mill source said. "As a result, we're being extremely conservative and cautious with our ore buying. We're rejecting spot offers now."
A Beijing-based trader said the consumption of steel material in May had been adversely impacted by adverse weather in China.
"The progress of construction projects has been impeded in May by rains that are now traveling from the north to the south to hit more regions in the country, so demand for building materials like steel and cement has also been sluggish," the trader said.
An indication of deteriorating steel market fundamentals was the decline in the Tangshan spot square billet price Thursday, which fell Yuan 20/mt from Wednesday to Yuan 3,080/mt ($496/mt) ex-stock Tangshan, according to a mill source in Shandong.
Steel rebar futures in Shanghai inched lower Thursday with the most liquid October contract last trading at Yuan 3,555/mt, down Yuan 5/mt on the day, settling Yuan 40/mt lower from Wednesday to Yuan 3,595/mt.
Actual trading activity in the iron ore market also wound down Thursday as both buyers and sellers kept to the sidelines, awaiting a clearer market direction before committing to spot procurement or sales.
"Generally, the market outlook for the immediate future is bleak and there is a lot of volatility going on," a Shanghai-based trader said. "In such a market, it's quite common to see even the sellers retreating and not wanting to offer cargoes, for fear of only getting very low bids."
Meanwhile, port stocks of 61%-Fe Australian Pilbara Blend fines at Qingdao, northern China, were heard to be offered at Yuan 900/wmt ($129/dmt on an import parity basis) free-on-truck, including Yuan 35/wmt in port charges and 17% VAT. This was lower than the Yuan 920/wmt offer levels heard for PB fines cargoes in Qingdao last week.