ShareCafe readers will know by now that the boom in iron ore prices is down to the continuing solid demand from Chinese mills.
The factors advanced by analysts and others have been many – rising steel prices, shortfalls in supply from Australia and especially Brazil and, more importantly, the growing crackdown on pollution and capacity.
Back in April we explained the crackdown when it started in the major steel-making region of Tangshan, southeast of Beijing with over 20 companies ordered to close for varying periods of time, capacity and production cuts and threats of longer-term measures.
But in the last fortnight it has become clear that the crackdown on pollution (and emissions) and capacity are driving iron ore prices, along with the continuing buoyant market conditions.
While the new policy will force Chinese steel mills to downsize and to change their production methods and mix, the bottom line is that all existing players are now protected from new entrants with new technology or better ideas.
Takeovers are to be encouraged, but they will be aimed at reducing capacity by junking older, higher polluting equipment. New investment will be encouraged in green steel making technologies that BHP and a Chinese company are looking at and at a trial in Norway getting underway shortly.
Watch for the Chinese to promote green hydrogen use in the steel sector in addition to electric arc technologies.
While China’s iron ore imports will continue around current levels for some time, they will start falling over time. In reality for countries like Australia the trade will continue but the boom is over.
The changes, some of which started on May 1 and the others on June 1 will see no more expansion of China’s crude steelmaking sector.
Every new tonne of capacity will be electric arc technology and the tonnage involved will be smaller than the crude steel capacity it is replacing.
And any new capacity will have to be on a replacement basis – electric arc only not blast furnace. And the replacement of existing capacity, especially in environmentally sensitive areas of the country such as the Pearl River Delta, the Yangtze River basin and around the Tangshan- Beijing area – will be on the basis of a 50% to 75% cut in the capacity (crude steel) being replaced.
And shifting existing capacity from the environmentally sensitive areas to other parts of the country will be curtailed.
Iron ore prices will remain volatile and demand for products such as pellets and the 65% Fe fines from Brazil, will rise because they take less energy and involve fewer emissions to turn into steel.
For Australian companies like BHP, Rio Tinto, Fortescue, Roy Hill, Atlas and Mineral Deposits this is bad news. For the country’s only pellet maker – Grange Resources with its Tasmanian operations, it’s good news.
And the real winners of the changes will be the Chinese steelmakers – and that’s the opinion of Moody’s, the US based ratings group which supports the Chinese government’s moves.
And when an independent analyst says one side in a deal will benefit, you know the other side will be losers – and that’s mostly Australian iron ore companies.
In its commentary issued this week Moody’s makes it clear the capacity control controls “indicates the government’s resolve to reduce domestic steel production to counter overcapacity and reduce carbon emissions.”
The updated policy will tighten the current steel capacity swap ratio, a system that allows producers to swap new capacity in return for more closures of older capacity elsewhere.
According to Moody’s “the updated policy takes effect on 1 June and is credit positive for China’s steelmakers because it will protect profit margins and operations by gradually reducing the country’s steel sector overcapacity.”
“The new policy will support steel prices by achieving a more stable supply and demand balance; it will also moderate iron ore prices that recently reached record levels.”
“Stricter steel capacity swap ratio requirements under the updated policy are likely to lead to a gradual decline in steel production,” according to Moody’s.
“A subsequent reduction in steel supply will allow the industry to improve supply and demand balances and facilitate higher plant utilization rates. Stricter capacity and supply control will also support steel prices as the demand for steel gradually weakens as China’s economy grows at a slower pace.
“In addition, reduced steel production volume will also lessen the pressure from rising iron ore prices. Iron ore prices have recently peaked at a historical high of around $200 per ton as a result of increased demand because of the gradual recovery of the Chinese economy following the pandemic.”
In fact iron ore prices are still rising and the price of the benchmark 62% fines is now more than $US230 a tonne. But that was down on Thursday as Chinese futures sold off.
