China production cuts won’t end iron ore boom

Strict environmental controls designed to curb steel production in China are unlikely to signal the end of the boom in iron ore prices, and miners producing higher grades of iron ore are likely to see a benefit from the restrictions (reports The AFR)
26th March 2021
Resources Rising Star

Strict environmental controls designed to curb steel production in China are unlikely to signal the end of the boom in iron ore prices, and miners producing higher grades of iron ore are likely to see a benefit from the restrictions (reports The Australian Financial Review).

The price of spot iron ore fell 2.7 per cent to a six-week low of $US157.01 a tonne on Monday, according to Fastmarkets MB, with investors cautious over the outlook.

Last week, policymakers in Tangshan, China’s steel-making hub, announced plans to curb production for several steelmakers until the end of the year to reduce emissions.

But despite prices dropping in the initial fallout from the decision, some experts believe market conditions will remain supportive for producers.

“This is the start of the boom, not the end,” said Tribeca Global Natural Resources portfolio manager Ben Cleary.

“China is announcing a number of decarbonising policies that will increase steel usage, not decrease it.”

Mr Cleary said China’s push to increase renewable energy infrastructure would require a large amount of steel and keep demand for iron ore intact.

“What China has announced is a material increase in efficiency targets, so smaller operators that are high carbon emitters will be closed in favour of state-owned enterprise operators running at scale,” he said. ”This will require more high-grade iron ore, which Australia supplies.”

The increased restrictions on emissions in China have not convinced everyone, however. Since the start of March, the price of spot iron ore has fallen more than 10 per cent.

“I think it’s a reasonable assumption that we see it come back to $US100 a tonne over the course of this year and then back to $US75 in the longer term,” said T. Rowe Price equity analyst Tom Shelmerdine.

“In the past five years the price has been as low as $US38 a tonne, so you’d look at $US75 a tonne as still being a very reasonable price.”

But Mr Shelmerdine said the market would begin to favour higher quality iron ore, increasing the premium that steelmakers were willing to pay.

“The quality premium is starting to open up again and this really reflects the steel profitability and the environmental focus,” he said.

“As China starts to clean up its steel industry, by capping the higher-carbon steel, that will drive demand [for] a higher grade of iron ore.”

The change in premium will mean producers such as BHP Group will begin to see a better realised price than producers like Fortescue Metals Group.

BHP, Rio Tinto and Fortescue all traded higher on Tuesday, with Fortescue and Rio rebounding from 2021 lows. BHP added 1.1 per cent to $44.99, Rio 0.1 per cent to $107.92 and Fortescue 1 per cent to $19.36.

“The impact on iron ore prices, though, may not be as bad as the immediate reaction suggests,” said CBA mining and energy commodities analyst Vivek Dhar in a note to clients.

“Weaker steel production in China may support higher steel mill margins. That could ultimately drive iron ore prices higher.”

 

Image: Rio Tinto

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