China’s appetite for steel has surpassed 1 billion
tonnes a year, but it is becoming increasingly expensive to source the key
ingredient – iron ore – from abroad
Some say Chinese demand for iron ore will fall as the pandemic
stimulus starts to wear off, but China is proactively looking for alternative
sources
Iron ore is mined raw material used to make crude iron, also known
as pig iron, and nearly all of it is used to make steel. Roughly 1.5 tonnes of
iron ore are required to produce one tonne of steel. The higher the iron
content in the ore, the higher it is graded and the more valuable it becomes.
Why does China need iron ore?
China consumes more iron ore than any other nation, as it is by
far the world’s largest steel producer, with its output greater than all other
steelmaking countries in the world combined.
China churned out a record 1.05 billion tonnes of crude steel in
2020, with demand boosted by Beijing’s stimulus measures for infrastructure
such as bridges and roads and both new commercial and residential buildings.
Using recycled materials such as scrap steel is considered one small way in
which China can help meet its steel demand, but this option is not without
significant difficulties and limitations. Analysts say a recent move to permit
scrap steel imports after a two-year ban was long in the making, as Chinese
authorities pivot towards waste management and recycling.
But they added that, due to rising higher prices of imported scrap
particularly in local markets and that most steel mills use the oxygen and iron
ore method of making steel, it is unlikely that Chinese steel mills will be
quickly replacing large amounts of imported iron ore with scrap steel in the
short term. The other factor preventing scrap steel from becoming a fast
replacement for iron ore is the small size of the global scrap market.
The bottom line is that there are currently no viable alternatives
to iron ore, and China’s main pathways to diversifying its iron ore supply – by
using more scrap steel, opening new mines overseas, finding new import sources
and increasing domestic production of iron ore – are riddled with obstacles
that will take years to overcome. China’s forecast steel output for 2021 is a
whopping 1.065 billion tonnes, according to the Metallurgical Industry Planning
and Research Institute, up 1.4 per cent on actual output from a year earlier.
Where does China get its iron ore from?
Australia and Brazil, the world’s two largest iron ore producers,
are far and away China’s top suppliers.
Even though imports from India soared 88 per cent last year – to
nearly 45 million tonnes – as Chinese mills tried to diversify their sources
amid sky-high prices for the raw material, Indian iron ore still accounted for
just 1.8 per cent of China’s import total. Meanwhile, Australian shipments rose
7 per cent to 713 million tonnes last year, while Brazilian supplies were up
3.5 per cent at 235.7 million tonnes, data from China’s General Administration
of Customs showed. In the short term, despite its trade conflict with China, high
iron ore prices and strong Chinese demand have had a positive impact on the
Australia economy.
Tang Chuanlin, an analyst with Citic Securities, said in January
that Australia and Brazil still could not meet China’s demand for iron ore.
“Mills had to buy from other countries.”
Tang also noted that Chinese steel firms were
using more low-grade ore, like India’s, as part of an effort to lower costs.
Almost two-thirds of India’s iron ore exports to China had less than 58 per
cent iron content, according to Indian mining industry estimates. India puts a
30 per cent export duty on ore with iron content above 58 per cent, to protect
its domestic supply and steel industry.
Ores with iron content above 65 per cent are
regarded as “high-grade”.
Questions about the reliability of India’s iron
ore exports were laid bare in December when the Indian Steel Association called
for an immediate six-month ban on iron ore exports, given soaring prices and a
shortage of the product.
China has interests in overseas mines with abundant
iron ore reserves, including in West Africa, yet most of it remains
inaccessible amid bureaucratic wrangling and limited capital. There are plenty
of raw materials to go around, but the key is extracting them economically.
Chinese state-owned enterprises have made deals
involving parts of the world’s largest untapped iron ore deposit – the massive
Simandou mine in West Africa’s Guinea – that boasts billions of tonnes of
high-grade iron ore.
China has interests in both the northern and
southern blocks of the reserve through companies Shandong Weiqiao and Aluminum
Corp of China (Chinalco). But getting Simandou up and running requires the
construction of new large-scale production facilities and transport
infrastructure that will take time to build and whose construction is likely to
run into problems like most big mining projects do, according to analysts.
And even if the mine does roar to life in the
next few years, its maximum capacity of about 150 million tonnes a year would
still be just a small portion of the global market share now dominated by
Australia and Brazil.
This leaves China heavily dependent on its
current suppliers of iron ore for the foreseeable future. Based on current
contribution rates, Australia is likely to supply about 700 million to 800
million tonnes of iron ore to China this year, while Brazil will supply about
300 million tonnes.
What are the problems for China’s iron
ore needs and its supply?
China’s domestic iron ore supply is relatively
low-grade and expensive to process. Its mines are also being rapidly depleted.
Thus, many Chinese steelmakers find it is cheaper and more efficient to use
imported, high-grade iron ore to meet demand.
That demand from steel plants, coupled with
growing concerns over a worsening relationship between China and Australia,
have helped send the price of iron ore to its highest point in several years,
while forcing Chinese regulators to step in to curb speculation. Minister
for Industry and Information Technology Xiao Yaqing, at the 2021 National
Industry and Information Work Conference in December, also asked the steel
industry to “resolutely” reduce its output in 2021.
As the bulk of China’s iron ore
supply is imported from Australia and Brazil – Australia supplies about 60 per
cent of China’s iron ore – the souring relationship between Beijing and
Canberra is adding concerns that bilateral iron ore trade could be disrupted.
For now, the iron ore trade remains normal, and there is no sign that Beijing
will restrict Australian iron ore imports.
The price of iron ore has been mainly pushed up
by recovering profits for steelmaking in China and rising demand for steel
products from the downstream manufacturing and construction sectors, as the
Chinese economy recovers rapidly from the coronavirus. Then there is the supply problem.
China has become an increasingly
important market for Brazilian miner Vale, which
dominates Brazil’s iron ore exports and is also taking steps to boost its
supply to China, with increased shipments to China’s new deepwater ports that
can accommodate the company’s huge “Chinamax” ore ships and more on-site iron
ore sales at Chinese ports, but this will take time. But Vale is performing under
expectations due to a series of setbacks, including the Brumadinho dam collapse
in early 2019 that killed over 250 people.
What is the iron ore outlook for
China?
Analysts at the China Iron and Steel
Association (CISA) have predicted that, over the next year, Chinese demand for
iron ore will fall as the pandemic stimulus starts to wear off, steel mills cut
back production due to poor profitably, and other non-Australian iron ore
miners such as Brazil resume full production. This should lead to lower prices,
they said, though they warned that strong iron ore derivatives trading could
keep prices buoyant.
The CISA has urged Chinese authorities to look
closely at market speculation in iron ore and consider changing market trading
rules to avoid distortions.
High iron ore prices may correct on slowing demand, but derivative
trading could still keep prices up
Despite the worries about the impact of
speculation, some analysts are confident that lower fundamental demand will
lead to a correction in prices, especially as the construction of property and
infrastructure in China slow down in the coming year, as they expect.
The Australia government’s Office of the Chief
Economist, in its energy and resources quarterly outlook for December, said it
expects prices to fall only gradually in the coming months, especially with
iron ore production outside Australia, including Brazil, still facing curbs.
It is forecasting that prices will remain above
US$100 a tonne until mid-2021, before falling to around US$75 by the end of
2022 as the Brazilian supply recovers and Chinese economic stimulus eases back.
Other factors, in particular China’s goal
to reduce carbon emissions , are
also expected to help drive down steel production.
Source: https://www.scmp.com/