China’s iron ore demand is expected to drop 7 per cent, as steel-making cities across northern China begin rolling out anti-pollution measures from next month, which could trigger further weakness in the spot price following on from last week’s 12 per cent slump.
These plans include cutting steel production capacity by half and, combined with restrictions being put in place to clean up the environment across the country, will cut iron ore demand by seven to 8 million tonnes a month, according to Xu Xiangchun, chief information officer at Chinese research firm Mysteel.
For most of this year, China’s “war against pollution” was actually working in favour of Australia’s iron ore producers.
A central government campaign to shut down outdated steel production, which targeted smaller, high-polluting induction furnaces using scrap metal, tightened supply and pushed up prices. Along with a pick-up in infrastructure spending and a resilient construction sector, this resulted in a much more profitable steel industry in China.
And that was good for the likes of BHP Billiton, Rio Tinto and Brazil’s Vale as cashed-up Chinese mills sought out higher grade iron ore to feed their furnaces, which had the dual effect of increasing productivity and reducing emissions. The iron ore spot price rose from a 2017 low of $US53.36 a tonne in June to break through $US80 in mid August.
However, after a good run, China’s pollution fight may now be turning against the big iron ore producers.
Over the past two weeks, nine cities in northern China released their detailed action plans to combat pollution in the winter months when heating requirements and a concentration of heavy industry can make the air unbearable across this region.
The plans were first flagged early this year as a joint initiative between Beijing, Tianjin and 26 smaller cities across the provinces of Hebei, Shanxi, Shandong and Henan, including the cities of Xuancheng, Liu’an, Anqing and Chizhou.
The cities have vowed to close illegal polluting businesses, ban the use of small coal-fired furnaces for winter heating and importantly for iron ore producers, cut steel production capacity in half.
At first the news buoyed the iron ore price amid expectations it would boost steel production in the lead-up to winter as mills brought forward their activity. However, more recently questions are being raised about the long-term trend for iron ore demand.
The spot price of iron ore in China fell 3.8 per cent on Friday to $US63.56 a tonne, taking the total fall for the week to 12 per cent.
In China, futures on the Dalian Commodity Exchange, which is dominated by retail investors and driven by sentiment, fell for the fourth straight week.
Fortescue Metals Group shares fell almost 8 per cent last week, while BHP and Rio were also slightly lower across the week.
“The environmental policies are definitely having an impact on the iron ore market,” said Xu Xiangchun, chief information officer at Chinese research firm Mysteel.
“Different places put different restrictions on the scale of steel production. I think these combined will cut iron ore demand by seven to 8 million tonnes a month starting in October,” he said, explaining that was a drop of about 7 per cent.
The nine cities that detailed their pollution plans over the past two weeks account for more than a third of China’s overall steel production, according to Qiu Yuecheng, an analyst at steel trading platform XiBen New Line.
“This is quite significant,” he said, although added recent iron ore price weakness was due to concerns about China’s long-term economic outlook as much as the fight against pollution.
He said about 87 per cent of iron ore was imported to China, of which Australian producers accounted for roughly 60 per cent.
However, he noted the cuts announced by the northern Chinese cities in their anti-pollution plans were to steel production capacity, not output. He said some mills tended to overstate their capacity to lessen the impact of the government-mandated cuts.
Still, the plans released last week were a reminder local governments around the country are aligning themselves with Beijing’s “war against pollution” which was officially declared in early 2014 by Premier Li Keqiang. Environmental issues are once again likely to be highlighted as a priority at the Communist Party’s National Congress next month, at which top leadership positions will be reshuffled. China is due to introduce a national emissions trading scheme by the end of this year and has already being piloting schemes in major cities like Beijing and Shanghai.
Qiu said the iron ore market was also being affected by the steel industry’s embrace of electric arc furnaces.
China’s supply of recycled steel has increased as buildings and bridges are rebuilt and following the recent crackdown on mills using induction furnaces, which use scrap.
Electric arc furnaces use mainly scrap steel and emit far lower emissions.
“More and more steel mills are buying equipment to produce electric steel,” Mr Qiu said.
by Lisa Murray