Chinese iron ore prices dropped to their lowest levels in five months, as weak demand adds to evidence that the country’s economic rebound from tough coronavirus lockdowns may be faltering.
After strong steel production during the first quarter, the optimism and activity that followed the end of lockdown have waned, leading to a “collapse” in the steel market and raising questions about the durability of the Chinese economic recovery.
The price of iron delivered into the northern Chinese port of Qingdao fell to $102.7 last week, down 23 per cent from its recent high in March, recovering slightly to $107.9 at Monday’s close.
The benchmark is regarded as a key price-setter for the global market because China is the world’s largest consumer of iron ore, the crucial ingredient for steelmaking. Iron ore is also a major profit driver for western mining companies such as BHP, Rio Tinto and Vale.
Normally March and April are peak production months for the Chinese steel market, but this year the country’s mills have cut their output in April as softening demand for steel makes it hard for them to generate profits.
During the first quarter, steel production at Chinese mills was 6.1 per cent higher than the same time last year, reaching 262mn tonnes, but customer orders have not kept pace, according to the China Iron and Steel Association.
“The demand for steel has collapsed since the start of April,” said one Hong Kong-based trader. “The market was expecting a 10 per cent increase in steel demand for infrastructure [this year], but our most optimistic estimate is 2 per cent.”
China’s manufacturing activity slowed in April, with the purchasing managers’ index that measures industry activity falling from 51.9 in March to 49.2 in April. A reading below 50 indicates a contraction.
In the construction sector, which accounts for about half of Chinese steel demand, growth has been slower than expected. New property starts in March were down 29.1 per cent compared with the same time the previous year.
Steel demand from the automotive sector, which accounts for between 10 and 15 per cent of Chinese steel consumption, has also been weak.
The slowdown in the manufacturing and construction sectors comes despite China last month reporting annual quarterly GDP growth of 4.5 per cent, well ahead of analysts’ expectations of a 4 per cent rise. However, many investors have become concerned about whether the pace of growth can be sustained.
Structural shifts in the Chinese economy as it builds its services sector will also reduce steel demand over time, according to Tom Price, analyst at Liberum. “Most of the sectors that use steel — property and infrastructure — are already built out,” he said.
China’s steel production last year fell 2 per cent to 1.01bn tonnes, according to the World Steel Association, partly due to government-mandated production cuts.
Erik Hedborg, an iron ore analyst at consultancy Cru, said weak demand in South Korea and Japan — where a shortage of semiconductors has slowed down auto production — has also contributed to the falling iron ore prices across Asia.
“We are in a normalisation period” following several years of relatively high prices, said Hedborg. “We expect iron ore prices will go below $100 this year but there is also a limit to the downside.”
Inside China, a campaign by the National Development and Reform Commission to push down iron ore prices has also had an impact, although it is not the main driver of the fall, according to market participants.
A source close to the NDRC said it was bearish on the outlook for iron ore, and expected China’s steel demand to peak soon. “The demand is facing a crash,” the person said.
In early March the NDRC published cautionary statements blaming “market speculation” for pushing up prices, and in April it warned futures traders against “hyping” iron ore prices, saying it would be stepping up its supervision of the market.
“Greater scrutiny by the National Development and Reform Commission on iron ore prices has also impacted the market,” said Siew Hua Seah, head of Argus Ferrous Markets, noting that trading companies had been warned by NDRC not to “hoard” commodities and drive up prices.
For mining companies such as Rio Tinto, BHP and Vale that sell iron ore to China, their production is still comfortably profitable at current prices.
Rio’s chief executive Jakob Stausholm said he was “not too worried” about the drop in prices.
“What you’ve seen in the last few weeks is that a number of steel mills have taken the opportunity to make a little shutdown,” he said, in response to questions at Rio’s annual shareholder meeting on May 4. “There might be a little bit less use for iron ore for now, but that might come back in a month or two.”
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