TREND: Fresh steelmaking cuts to take their toll on iron ore prices

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Thursday, November 2, 2017

Iron ore prices in the international market have oscillated dramatically since the start of the year, being disconnected at times from Chinese steel prices, according to an analyst.

London-based Capital Economics' chief commodities economist Caroline Bain said in a report this is not so surprising as a key factor supporting steel prices has been the prospect of Chinese output cuts, which would curb iron ore demand.

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"Despite the government claiming to have met its targets for taking steel capacity offline, steel production has been growing strongly this year [at least until September, when it fell back a little]. High prices have encouraged producers to ramp up output," Bain told BNamericas. 

However, according to Bain, the proposed cuts to capacity during the winter months will probably lead to lower output and weaker demand for iron ore.

Iron ore was trading at close to US$60/t on November 1, as opinions varied on the impact of fresh steelmaking restrictions in China, according to Metal Bulletin. So far this year, the highest the commodity has reached is US$94.90/t, in February.

CAPACITY CUTS

China's official news service Xinhua said the government of northern province Hebei ordered the shutdown of 33,600 small coal-fired boilers.

With the move, Hebei managed to reduce an oversupply of steel and cement by over 40Mt and 2Mt, respectively, and to reduce dust emissions as part of a government-driven effort to improve air quality in what is China's largest steel-producing region.

Commerzbank said in a note to clients one should not underestimate the environmental problems in China.

"Despite the many steps that have been taken, the ministry of environmental protection sees no year-on-year

improvements to air quality in northern China in September, a region that is particularly hard hit by smog and pollution in the autumn and winter months. "

According to the bank, further environmental protection measures are likely to weigh on the pace of China's economic development.

STOCKS AND PRICE OUTLOOK

Capital Economics believes the price of Chinese steel will decline, although in the near term it will be supported by government efforts to curtail pollution.

"However, we think that China's demand will taper off in the remainder of this year and into 2018, given the slowdown in construction and earlier policy tightening."

Furthermore, Bain told BNamericas that iron ore stocks at Chinese ports are still very high although a lot of the material is reportedly lower grade and steelmakers are showing a preference for higher grade ore as it is less polluting.

In another report, Capital Economics said the prospect of cuts to China's steel capacity is supporting steel prices but undermining iron ore prices, leading to a break in the traditionally close relationship.

According to Bain, iron ore is forecast to fall to US$50/t by the end of the year.