Iron ore prices falling as China’s restrictions on steel production continue to bite and economic growth slows

Anglo-Australian miner BHP has signalled that the heydays of extraordinary iron ore prices could be near their end amid China’s slowing steel production and its latest coronavirus outbreak. On Tuesday, the miner posted strong financial-year earnings on the back of high iron ore and copper prices just as iron ore prices dipped to near US$160 a tonne after striking a record high price of US$230 a tonne in May. “Medium-term, China’s demand for iron ore is expected to be lower than it is today, as crude steel production plateaus and the scrap-to-steel ratio rises,” the miner said in its outlook on commodities. The iron ore trade is one of the few gems in the China-Australia relationship untouched by their political and trade conflict that heated up in April 2020 when Canberra called for an international probe into the origin of the coronavirus without diplomatically consulting Beijing. Australian miners BHP, Rio Tinto and Fortescue Metals Group are the biggest exporters of iron ore to China. How iron ore powers China’s infrastructure boom The meteoric rise of iron ore prices has buttressed an otherwise tumultuous relationship between the two countries, but now prices have started to fall as a series of factors – including curbed steel output in China, the impact of a recent coronavirus outbreak and a strong drive by Beijing to cut carbon emissions – start to take hold. Australian miners will feel the sting of reduced profits, but there are no signs of risks to the trade with China thus far. Analyses show that, despite the fall in prices, the bottom lines of miners and the Australian government – to whom miners pay royalties and taxes on their exports – will still be in the black. Miners make a profit as long as prices stay above the break-even point of about US$30 to US$50 a tonne. Iron ore prices, while still in the profitable range, started falling about a month ago when Beijing stepped up its restrictions on steel production after committing last year to “resolutely” reduce its output in 2021. The high cost of iron ore and raw materials have raised concerns over factory-gate price inflation and slowing output, prompting Beijing to act. In the third week of July, authorities unofficially told steel producers in Anhui, Gansu, Fujian, Jiangsu, Jiangxi, Shandong and Yunnan to limit this year’s output to that of last year’s, according to analysts. In the following weeks, China’s Ministry of Finance said it would remove export tax rebates on 23 steel products, discouraging exports. “China Iron Ore and Steel Association (CISA) President Shen Bin also got in on the action with a ‘sucker punch’ to prices by vowing to accelerate and ensure China’s self-sufficiency in iron ore supply,” Navigate Commodities managing director Atilla Widnell said. In early August, steel mills in top steelmaking hub Tangshan were told to suspend the operations of some of their sintering machines to fight pollution, ING commodity strategists Warren Patterson and Wenyu Yao said in a note. China’s steel mills must improve efficiency to cut huge carbon emissions, analysts say Beijing’s cut to steel production is also underscored by its goal to ensure good air quality during the Winter Olympics early next year. For example, it set a target of reducing steel output in northern Hebei province by 21.7 million tonnes this year – which would be an 8.8 per cent decline from 2020’s production level of 250 million tonnes – as well as a 16 per cent decrease in the second half of this year, according to political analysts at Eurasia Group. This follows steel-production limits that were placed on other steelmaking regions such as Jiangsu and Shandong in June, the group said. “The production cap will be effective immediately [and will last] until the end of the Olympics next March,” Eurasia said in a note. “Altogether, these plans are part of the nationwide push … to ensure that year-on-year crude steel output reduction this year is a critical component of the sectoral carbon-peaking plan.” Buying from the steelmakers had been tepid, and spot imported iron ore prices slid further Mysteel Global S&P Global Platts forecast in early August that China’s construction steel demand was likely to drop in the second half of the year for the first time in six years. This also lines up with China’s crackdowns on several sectors, including real estate, in a bid to tighten the industry that has been plagued by high levels of debt and property speculation. The latest coronavirus outbreak, which started in Nanjing and spread nationwide, sent iron ore prices down another notch over fears that construction work might slow amid lockdowns. On Tuesday, steel analyst Mysteel Global said the “buying from the steelmakers had been tepid, and spot imported iron ore prices slid further”. China’s smallest businesses are crumbling as costs soar and help fails to arrive Adding to that, as BHP pointed out, China has said it is trying to move towards less environmentally harmful steel-production methods, including the use of electric arc furnaces and steel scrap, which would help reduce its heavy reliance on iron ore and meet its carbon emission-reduction targets. Iron ore prices will be under more downward pressure as supplies from Australia, Brazil and South Africa are likely to rise in the second half of the year just as China’s restrictions on steel production continue to bite, according to an analysis by Reuters late last month. The culmination of these factors will continue to push down iron ore prices, a move endorsed further by Premier Li Keqiang during an executive meeting of the State Council on Monday. Li said all levels of government must continue responding to key challenges, including “dealing with price increases of important raw materials” and stepping up their watch over key commodity markets.

Iron ore prices falling as China’s restrictions on steel production continue to bite and economic growth slows

Anglo-Australian miner BHP expects China will be needing less iron ore in the coming months Australian miners are likely to see reduced profits, but there are currently no signs of risks to the iron ore trade with China

Anglo-Australian miner BHP expects China will be needing less iron ore in the coming months

Australian miners are likely to see reduced profits, but there are currently no signs of risks to the iron ore trade with China