Australia’s biggest export is facing a major challenge as authorities in a key Chinese steelmaking city move to shut millions of tonnes of capacity in a move that could see billions of dollars of iron ore imports cut this year.
Up to $A6 billion worth of iron ore imports could be cut from 2021 imports from countries like Australia and Brazil.
Investors will no doubt be watching closely after tough rules on pollution control were announced in the big Chinese steel-making city of Tangshan.
The report knocked Chinese and global iron ore prices lower on Friday and for the week.
Analysts say the measures, if actually implemented and enforced, could cut steel production by 22 million over the year and iron ore imports by more than 30 million tonnes – the bulk of which would hit Australian exporters as we supply 70% or more of China’s annual imports.
That’s around 3% of 2020 Chinese iron ore imports and 2% of crude steel production.
A total of 23 steel mills (crude and stainless and other speciality types) have been caught not following previous production cuts aimed at lowering winter smog levels.
The measures seem, from western media reports, to be a form of punishment for Tangshan-based steel makers that failed to follow previous production cuts (to reduce smog levels) in winter.
The cuts in production were to start on Saturday with seven mills forced to cut production by half from Saturday until June 30, and by 30% in the second half of 2021, Reuters and MB Fastmarkets reported on the weekend.
The story will have a greater impact on the ASX today than the rise in gold, silver and oil prices on Friday.
Shares in the big three iron ore exporters – BHP, Rio Tinto and Fortescue all fell on Friday and last week and are down in the past month as iron ore prices have slowly drifted lower.
BHP shares dropped 6.4% last week (closing at $44.90 on Friday) and are down 5.1% in the last month; Rio shares lost 6.5% last week (ending the week at $109.06) and 11.5% in the last month and Fortescue shares ($20.01 close on Friday) dropped 5.8% last week and are down more than 16% in the past month.
Media reports on Saturday that a notice circulating in China’s steel industry that threatens output cuts between 30% and 50% for pollution defaulters in Tangshan over the rest of 2021.
That saw futures prices of iron ore and coke on the Dalian Commodity Exchange drop 4%.
Fastmarkets MB reported a $US5.23 or 3.1% fall in the price of 62% Fe fines (delivered to northern China) to $US161.39 on Friday.
The price of 65% Fe fines (mostly from Brazil) fell $US4.80 a tonne to $US187.50 on Friday in the wake of the news.
The falls meant the price of 62% Fe fines dropped 1.8% over the week and the price of 65% Fe fines down 1.6%.
The prices of both ore types are within a few dollars of falling under the closing prices for 2020 on December 31 of $US160.47 a tonne for 62% Fe fines and $US172.90 a tonne for 65% Fe fines.
Reuters quoted the document, circulating among Chinese steel mills, as saying:
“To strengthen supervision of steel enterprises and raise punishment for illegal behaviour, the city government has… decided to impose production and emission cutting measures on firms that failed to take emergency action,” the notice said.
Fastmarkets said in a report that “Tangshan’s environmental protection office said on Friday March 19 that it is looking to tighten its grip on air pollution in the city, especially after it found that not all steelmakers had abided by production restrictions in the previous round of controls.”
“The measures are to be imposed on errant mills, including requiring seven steel mills to cut production by 50% from March 20 to the end of June and 30% for the rest of the year.
“Another 16 steel mills are required to cut production from March 20 to December, while two “A-class” mills are required to cut production by about 30% from March 20 to April 20,” Fastmarkets reported.
Reuters reported that the plan was still at the draft stage and an official at one of the mills mentioned in the notice said it had not yet been received
Mills in Tangshan produced 144 million tonnes of crude steel last year, or more than Japan (and around 14% of China’s total crude steel output) but is one of China’s 10 smoggiest cities, according to Reuters.
If the draft plan is adopted, output of molten iron will fall about 22.23 million tonnes this year, which could slash iron ore demand by more than 35 million tonnes, analysts with the Mysteel consultancy estimated. The consultancy pointed out that capacity utilisation in Tangshan had fallen 10 percentage points by Friday, indicating that output cuts are underway.
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Oil rose more than 2% in choppy trading on Friday, ended the week about 7% lower for its biggest weekly drop since October.
The driver for the fall was the continuing fears about the impact on demand from the new wave of coronavirus infections across Europe.
Even though the situation in the UK has improved, France, Italy, Poland, Spain and Germany continue to battle new outbreaks in what some specialists are describing as a third or 4th wave.
Friday saw Brent crude settle up $US1.25 a barrel, or 2%, at $US64.53 a barrel while in the US West Texas Intermediate (WTI) crude rose $US1.42, or 2.4%, to $US61.42.
The loss for the week for both crude benchmarks was just under 7% after Thursday’s 7% slide as a number of European economies reimposed lockdowns and vaccination programs were slowed by distribution issues and temporary halts on fears of side effects.
Traders said prices rose Friday because they saw Thursday’s sell-off as overdone.
Late in the session the weekly data on rig use showing a big rise had little impact on prices.
The Baker Hughes weekly rig use report showed US energy firms added the most oil and natural gas rigs in a week since January.
The oil and gas rig count rose nine to 411 in the week to Friday (March 19), its highest since April.
That rise sees the rig count up 68% since falling to a record low of 244 in August 2020, according to Baker Hughes.
The total count, however, is still 361 rigs, or 47%, below this time last year.
Active US oil rigs rose nine to 318 last week, the highest the figure has been since May, while gas rigs were unchanged at 92.
US oil stocks rose for a 4th week in a row according to data from the US Energy Information Administration.
The EIA said that at 500.8 million barrels, US crude oil inventories “are about 6% above the five-year average for this time of year. Total motor gasoline (petrol) inventories increased by 0.5 million barrels last week and are about 4% below the five-year average for this time of year.”
“Over the past four weeks, motor gasoline product supplied averaged 8.1 million barrels a day, down by 13.0% from the same period last year. Distillate (diesel) fuel product supplied averaged 4.1 million barrels a day over the past four weeks, down by 1.3% from the same period last year.
“Jet fuel product supplied was down 36.2% compared with the same four-week period last year,’ the EIA said in last week’s update.
US oil production was around 10.9 million barrels a day, down 2.2 million barrels on a year ago. The average for the past four weeks was just under 10.4 million barrels a day, down 20.5% on a year ago.
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Meanwhile, gold and copper all rose on Friday as the US dollar weakened slightly in the wake of a fall in bond yields.
Gold rose 1% over the week after a solid session on Friday (up around 1.4%) with the price settling at $US1,740.70 and then rising further in after hours trading to end the week at $US1,744.50.
Copper rose by around 0.11% to end at $US4.11 a pound and fell nearly 1.3% for the week while silver eased at the end to finish the week at $US26.335 an ounce, up around 1.3% over the five days.
