Virus-related shutdowns have negatively impacted steel demand and future uncertainty is depressing ore prices, for now.
Iron ore spot prices for delivery in China have fallen dramatically over the last year. In July 2021, the price stood at $224 per ton; by mid-July 2022, the price was wavering around the $110 mark. In the interim, it’s been a rocky ride, with the commodity achieving a 2022 high in March of around $160 per ton before going on a roller coaster ride in June. It started off at $145 per ton and tried to close in on $150, before plummeting to levels not seen in seven months.
Price volatility signals the perception of uncertainty on the part of traders. It’s impossible to assign a single cause for these price swings, but China’s economy, particularly its zero-COVID policy and its implications, is playing a large role.
Of course, developments in China are not alone responsible for iron-ore price chaos—the war in Ukraine, for one, has been disrupting metals markets globally. Ferrexpo, a Swiss-based trading and mining company and the third-largest exporter of iron-ore pellets, declared force majeure on some contracts earlier this year thanks to Ukraine’s snarled logistics networks. But those developments would have tended to constrain supply and push prices up. And yet, the opposite situation currently prevails.
China buys over one-billion tons per year of iron ore—70% of the total global seaborne trade—and produces over one-billion metric tons of crude steel per year—53% of the world’s total. That’s why demand for iron ore in China will inevitably loom large on the global landscape.
The zero-COVID policy distinguishes China from much of the rest of the world, where economies have largely been opened up, even on the face of new virus variants and outbreaks. Not so in China, where the government recently shut Shanghai down for over two months. Some manufacturing facilities in Shanghai were shuttered for ten weeks or more, and China’s domestic demand for steel, and for the iron ore that goes into producing it, have suffered as a result. It’s also been reported that some manufacturing workers and truck drivers have been slow to return to work, hampering the effort to open the Chinese economy.
China Steel Production Down
In February, He Wenbo, chairman of the China Iron and Steel Association (CISA), opined that steel demand in China would remain stable during 2022. But his review of the industry after the end of the first quarter of this year, reported on the CISA website, indicated that domestic steel production in China decreased by 10.5% year over year, and that “downstream steel consumption is still recovering.”
A recent report from S&P Global showed that “some Chinese steel mills, especially the private ones, have started to voluntarily cut steel output as weak steel demand dragged their margins into negative territory.” And, as a recent report from the International Monetary Fund put it, “A sharper-than-expected slowdown in China’s growth would negatively impact the iron ore price.”
In short, the lingering effects of COVID-19 lockdowns and the threat of more to come would have a negative impact on the trajectory of China’s economic growth and on steel and iron ore demand. Current ore prices reflect the fact that traders are less than optimistic.
Besides the zero-COVID factor, another reason for plummeting iron-ore prices is the tactic taken by some Chinese steel producers to buy lower-quality ore, which is cheaper than the higher-quality alternatives reflected in spot prices and industry indexes. Decreases in spot prices over the last year reflect lower demand for “62% Fe,” ore which is at least 62% iron.
The world’s top-three iron ore mining companies, Rio Tinto, Vale, and BHP, shipped out higher volumes in the second quarter of this year than in the first quarter, but, according to the S&P Global report, volumes of higher quality ore were lower in the case of Vale and BHP, and shipments by BHP of lower-quality ore were elevated. The lower quality ore, it’s worth noting, burns dirtier, jeopardizing industry decarbonization efforts.
The switch to lower-quality ores, combined with the reduction in steel production by some Chinese producers, may have also been a play to “lower input prices, including iron ore prices,” according to John Tuer, CEO of Labrador Iron Ore Royalty Corporation, part owner of Iron Ore Company of Canada (IOC), an affiliate of the Australia-based Rio Tinto.
It’s also been reported that China is seeking to set up an iron ore purchasing group to diversify its sources of supply away from Australia, with which it has been having trade tensions since 2020, and toward other major producers such as Brazil—but also to exercise bargaining power to negotiate favorable prices for ore.
Price Outlook for Seaborne Ore “Attractive”
For all of the volatility seen in the iron ore market, “the price outlook for seaborne iron ore remains attractive,” according to Tuer, who added that “steel production in China is expected to increase.” Rio Tinto, he said, is expecting 2022 sales for Iron Ore Company of Canada of between 17.0 million and 18.7 million tons. “This compares to 16.6 million tons of saleable production in 2021,” he noted, an increase of between 2.4% and 12.7%. That represents quite a large gap in the growth projection, an indication of continued uncertainty over China’s level of steel production and iron-ore demand for 2022, and less than reassuring to traders who may be looking for a comeback in China’s steel industry.
Beijing has embarked on a series of stimulus measures designed to boost the economy, and, in particular, manufacturing, in the second half of this year. But it’s too early to say if they will work, especially in light of possible fresh shutdowns as the COVID-19 virus continues to spread.
That’s why the outlook for iron-ore prices for the rest of this year rests largely on how successful China is at containing COVID-19. The avoidance of further virus-related shutdowns will put the Chinese economy on better footing and will boost the housing, infrastructure, and vehicle manufacturing sectors, all of which will play a large role in the domestic demand for steel—and for iron ore. Or maybe not.