Recent price corrections in the iron ore market are attributed to several factors.
The initial surge in oil prices has retreated, leading to a loosening of cost support and a dissipation of geopolitical risk premiums.
Concurrently, supply from overseas shipments is currently in a mid-year volume surge phase, while demand-side expectations for reduced molten iron production have intensified.
This combination has placed marginal downward pressure on the fundamental supply-demand balance of iron ore itself.
Considering ongoing uncertainties in the Middle East, even if a subsequent agreement ensures normal shipping lanes, supply recovery will take time and depleted inventories will need replenishing.
Therefore, a sustained and sharp decline in oil prices in the near term is unlikely; we anticipate oil will fluctuate around a relatively high central price level.
Against this backdrop, examining historical iron ore supply, demand, and price performance during periods of elevated oil prices can provide valuable insights for analyzing its potential future trajectory.
Pressures Mount as Molten Iron Production Nears Peak
The recovery in molten iron production during the second quarter has been relatively weak.
Following a brief rapid rebound in early April, daily output from steel mills has only increased marginally and remains weaker compared to the same period last year.
July and August represent the traditional off-season, and with external uncertainties persisting, domestic policy is likely to maintain its stability.
Expectations for a seasonal decline in molten iron output are relatively strong, which will further test the resilience of the industrial chain.
Consequently, pressure from a marginal weakening in iron ore demand is gradually increasing.
Supply Side Enters Mid-Year Volume Surge Period
Overseas iron ore shipments have increased significantly in the first half of the year, with cumulative shipment growth exceeding 35 million tonnes, representing a year-on-year growth rate of approximately 5%.
Shipments from major mining companies have grown steadily, while non-mainstream miners have also shown high shipment activity.
Beyond the continued production ramp-up at the Simandou project in Guinea, exports from India have also stabilized and begun to recover.
Since mid-to-late May, overseas mines have entered their mid-year volume push phase.
June saw iron ore shipments remain at high levels, showing a clear sequential increase and consistently staying at historically high levels year-on-year, which has recently intensified domestic supply pressure.
We anticipate a seasonal decline in shipments after entering July, but overall shipments, amid an expansion cycle, are expected to remain at elevated levels compared to historical periods.
Structural Support from Port Inventories Weakens
The drawdown of iron ore port inventories in China during the second quarter has been weak, with current stockpiles at historically high levels and still above those at the start of the year.
Facing substantial overseas supply pressure, the recent pace of inventory accumulation has been stronger than seasonal norms.
Considering the anticipated seasonal drop in end-user demand and the subsequent arrival of cargoes from the mid-year shipment surge, the pressure from high port inventories is unlikely to ease in the short term.
Previously, restrictions on the liquidity of certain ore grades due to long-term contract negotiations provided some structural support, meaning the full pressure of high inventories had not been fully reflected in futures prices.
However, as restrictions on related ore types gradually ease, the logic for this structural support has significantly weakened, and the suppressive effect of high inventories on the futures market is growing stronger.
Freight Cost Support Loosens
Following the Middle East conflict, international shipping freight rates surged dramatically.
The proportion of Australia-to-China and Brazil-to-China freight costs within the total landed cost of iron ore rose to historical highs.
Compared to pre-conflict levels in March, freight rates from Australia and Brazil to China increased by approximately $6/tonne and $14/tonne at their peak, directly driving a short-term spike in the landed cost of iron ore.
Subsequently, as tensions eased, freight rates quickly retreated by $5-$6 from their highs, leading to a significant loosening of phased cost support and a rapid dissipation of geopolitical risk premiums.
This has been a key factor in the recent correction in iron ore futures prices.
Impact of Oil Prices on Iron Ore
Currently, with the de-escalation of the Middle East conflict, crude oil prices have retreated notably.
However, given that supply recovery requires time and the substantial inventory drawdown from the earlier period needs replenishment, we believe the likelihood of a sustained, sharp decline in oil prices in the short term is low.
Oil is expected to fluctuate around a relatively high central price level.
In this context, studying historical iron ore supply, demand, and price performance during high oil price periods can aid in better analyzing its potential future path.
In terms of price levels, periods such as 2008, 2011-2014, 2022, and the current 2026 have seen oil prices remain at elevated levels of $80/barrel or above for extended durations.
Our estimates suggest that for every $10/barrel increase in crude oil prices, iron ore production costs rise by approximately $0.40 to $0.80 per tonne.
Even in the absence of robust demand growth, higher energy costs provide a floor for iron ore prices.
However, analysis of recent historical high-oil-price environments reveals that the relationship between crude oil and iron ore prices is not a simple correlation.
Instead, it evolves dynamically with changes in the global macroeconomic landscape and the iron ore supply-demand structure.
Generally, oil prices influence iron ore prices through two main channels: firstly, by directly increasing landed costs through higher freight rates, and secondly, by raising mining production costs, which affects ore prices.
The former impact is more direct and rapid, while the latter is relatively indirect and lagged.
Furthermore, when macroeconomic conditions or iron ore supply and demand undergo剧烈 changes, the cost transmission effect from oil to iron ore becomes less significant.
In 2008, after spiking in the first half, oil prices plummeted sharply following the outbreak of the financial crisis, which caused a collapse in global aggregate demand.
Iron ore prices underwent a similarly剧烈 adjustment.
Overall, during this phase, the trends of crude oil and iron ore moved in sync, but this was primarily because both were impacted by the economic recession.
The cost transmission logic was weak, with systemic market risk and the resultant demand slump being the dominant factors.
During the 2011-2014 period, the correlation between crude oil and iron ore price movements was weak.
Influenced by complex Middle Eastern geopolitics and strong international demand, the average Brent crude price remained above $100/barrel for an extended period, only beginning a significant decline in the second half of 2014.
In contrast, iron ore prices fell consistently from around $170/tonne in early 2011 to approximately $70/tonne by the end of 2014.
The primary reason for this divergence was the massive addition of new capacity by the four major mining companies during this period, with average annual production growth around 10%.
On the demand side, China's pig iron production grew at an average annual rate of less than 5%, followed by a significant negative growth in 2015.
Thus, supply growth from the major miners far outstripped demand growth.
Many smaller and medium-sized mines were forced to cut or halt production due to high costs.
Although high oil prices pushed up extraction and transportation costs, the global market quickly turned to surplus with the influx of large volumes of low-cost iron ore, leading to a cost-collapse style decline in iron ore prices.
Overall, during this stage, there was little correlation between oil and iron ore price trends, indicating that when supply-side contradictions are sufficiently large, oil and iron ore prices can become largely decoupled.
Following the outbreak of the Russia-Ukraine conflict in 2022, Brent crude surged above $130/barrel briefly and remained mostly above $80/barrel for the subsequent six months.
Simultaneously, freight rates from Australia and Brazil to Qingdao rose by about $4 and $10, respectively, in the short term, though the peak was short-lived, with rates largely returning to their previous range within about a month.
Concurrently, iron ore prices also saw a rapid short-term increase of around 20%, followed by a further approximately 15% rebound over the next month.
Subsequently, as oil prices gradually retreated, iron ore prices began to correct in sync.
Overall, during this phase, the transmission effect from oil prices to iron ore prices was relatively effective, and the correlation between their trends was stronger.
In 2026, following the outbreak of the Middle East conflict, Brent crude surged above $110/barrel in a short period.
We believe the current high oil price environment is similar to that of 2022, also driven by a sudden geopolitical flare-up overseas leading to a sharp short-term oil price increase, creating a short-term correlation in their movements.
However, the difference lies in the fact that the global iron ore market is now entering a new expansion cycle.
Beyond the capacity plans of the four major miners, the Simandou project in Guinea, with significant Chinese investment involvement, commenced operations late last year.
Therefore, from a medium to long-term perspective, even if oil prices remain elevated later, iron ore still faces substantial downward pressure.
Although the current iron ore supply situation resembles the 2011-2014 expansion cycle, the scale of new capacity added by the four major miners back then was enormous and their costs were extremely low.
Consequently, we do not anticipate a repeat of the cost-collapse style price decline seen in that period.
Conclusion
Overall, we view the high oil price backdrop of 2026 as similar to that of 2022, while the oversupply in the iron ore market resembles a scaled-down version of the 2011-2014 expansion cycle.
Therefore, for iron ore, its price path is unlikely to replicate the effective price transmission seen during periods of tight supply-demand balance coupled with high oil prices.
However, it is also not expected to experience the cost-collapse style plunge witnessed during the past phase of产能爆发.
We anticipate that the cost support from high oil prices will remain effective in the short term, leading to a primarily range-bound movement for iron ore.
From a medium to long-term perspective, as cost support weakens and supply-side capacity is gradually released, iron ore is likely to experience a pattern of抵抗式下跌, with its price center预计 to shift downward gradually, making a smooth, one-sided decline unlikely.
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