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Iron ore shakes off China production restrictions

William McInnesReporter
Apr 16, 2021 – 2.59pm

A fresh cyclical high for iron ore traded in the spot market has defied concerns environmental restrictions introduced in China’s steel capital would end the run of favourable prices for the Australian economy’s No. 1 export.
Experts now speculate tight conditions will persist through the rest of the year amid strong global steel spreads and robust demand indicators.

Iron ore prices have remained high despite environmental restrictions in China. Bloomberg
While China has sought to curb emissions in the steel-making city of Tangshan by restricting production, demand has remained robust, particularly for higher grades of iron ore.
The price of 65 per cent quality, Brazil-origin fines reached a record high on Thursday, up 3 per cent to $US211.10 a tonne, according to Fastmarkets MB.
The benchmark 62 per cent spot price, often cited as a proxy for Australian output, rose 2.8 per cent to $US178.41 a tonne – the highest level since 2011.


“Steel margins in China are very attractive at the moment, so even with the restrictions in Tangshan, other producers have every incentive to try to increase operating rates,” ING head of commodities strategy Warren Patterson explained.

“Stronger margins, along with more focus on reducing emissions, has also proved supportive for higher grade iron ore demand. This is reflected in the quality premium, which has widened recently.”
The new environmental restrictions in China were expected to threaten the strength of the iron ore market. However, prices have remained robust.
“Overall, we expect prices to remain strong on a multi-year view.”
— JPMorgan analyst Lyndon Fagan
The outlook for Chinese activity was further supported by Friday’s first-quarter growth data, which showed the world’s second largest economy expanded 18.3 per cent compared to the March quarter of 2020.

Disruptions to supply from ports in Western Australia due to cyclone activity have also helped the supply-demand equation.
“With global economic growth forecasts revised higher, expectations for strong growth in steel demand are also growing and, in fact, global demand this year should return to well above pre-COVID-19 levels,” Mr Patterson said.
Production cuts in Tangshan unsettled the market earlier in the year, but analysts are confident other steel producers will be able to absorb the blow.
“Despite talk of nationwide inspections, we believe other regions will ramp up, particularly given the spike in steel margins,” JPMorgan analyst Lyndon Fagan said.
“Outside China, strong steel mill profitability in all regions, ongoing stimulus, and multi-year highs on leading indicators such as PMI point to the likelihood of a further acceleration in steel production and iron ore demand.”

But the strength of the iron ore market isn’t expected to last indefinitely, as supply picks up and China ponders broadening its environment restrictions on the steel industry.
“I am still of the view that this price strength will not be sustainable through the year,” Mr Patterson said.
“The Chinese government appears to be getting more concerned about rising commodity prices and inflation, which could potentially lead to credit tightening.”
Goldman Sachs analysts expect iron ore prices to fall back to $US110 a tonne by the fourth quarter, as the market enters a surplus in the second half of the year, driven by higher Brazilian exports.
They expect the price of the bulk commodity to fall below $US100 a tonne in 2022.
JPMorgan expects the price of iron ore to be $US162 a tonne by the fourth quarter of the year, dropping to $US125 a tonne in 2022. The broker believes that even if Brazilian miner Vale ramps up production, its increased supply will be soaked by higher demand.
”Overall, we expect prices to remain strong on a multi-year view,” Mr Fagan said.