China is reducing its steel production. How it hurts iron ore prices

Iron ore prices hit record highs this year, but appear to be suffering their biggest monthly loss of all time as Chinese restrictions on carbon emissions include limits on steel production, hurting demand for the raw material used to produce it.

“The market is not short of iron ore, but short in terms of consumption because the steel mills have their hands tied in a market where the global demand for steel is healthy and yet the steel mills find themselves unable to produce” , explains Rhys Pittam, iron operations manager at Marex.

The pessimism in the market is “China-led” because the country is the largest producer of steel products and consumer of iron ore, he said. China announced crude steel production restrictions this year in an attempt to cut carbon emissions.

At $ 148.99 per metric tonne on August 17, the August CME futures contract for 62% iron ore fines delivered to China traded down about 30% month-to-date , on track for the largest monthly percentage decline based on data dating back to 2010, according to Dow Jones Market Data. Futures prices fell 32% from the July 16 high of $ 219.77 per metric tonne.

The fall in prices was mainly caused by tighter cuts in Chinese steel production in the second half of the year, and demand for steel weakened due to warm weather and precipitation in China, as well as the ‘increase in Covid-19 cases, explains Niki Wang. , editor, pricing, iron ore and steel, at S&P Global Platts.

The World Steel Association pegged China’s steel output in June at 93.9 metric tonnes, down 5.6% from May.

China has also pledged to cut steel production to cap the costs of raw materials, like iron ore, said Sanjeeban Sarkar, chief raw materials editor at the Economist Intelligence Unit (EIU).

Strong demand has kept iron ore prices from collapsing, but they may have ‘passed their peak’ and continue to decline in the second half of this year as Chinese steel production falls from 2020 , he said.

In addition to steel production cuts, China also changed export taxes in May and July, “reducing incentives to produce for international markets,” BofA Securities analysts wrote in a recent note. China reportedly canceled export tax rebates on some steel products in May and increased export tariffs on a crude form of iron in July.

“New stimulus measures in China, some restocking ahead of the Winter Olympics, which could prompt further plant closures to contain emissions, and prioritization of value over volume by ore miners iron “could lead to a further rise in iron ore prices, according to BofA. analysts say. Prices may stabilize, but volatility may remain high.

The spread of the Delta Covid variant, meanwhile, weighs heavily on the outlook.

The possibility of lockdowns poses a significant threat to industrial activity, the spread of the variant in Latin America could hurt mining production, and lockdowns in China could slow steel production and put pressure on iron ore prices EIU’s Sarkar said.

The U.S. and China’s infrastructure plans could boost demand for iron ore as demand for steel increases, he says.

The EIU expects hot-rolled coil steel prices in 2021, based on China Free on Board, which concerns shipping and liability, which impact costs, average $ 793 per metric ton, up nearly 63% from 2020. It also sees iron ore averaging about $ 185 per metric ton this year and $ 155 in 2022 to 2023.

Marex is bearish in iron ore demand for the second half of this year due to China’s steel restrictions and increased supply, Pittam said.

Iron ore faces “strong headwinds given China’s interest in becoming ‘greener’,” he said, adding that China is considering introducing scrap futures contracts at the Dalian Stock Exchange and to work with steel mills to encourage increased production using scrap metal.
Source: Barron


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