Por Clyde Russell | Fonte: Reuters

LAUNCESTON, Australia (Reuters) – China’s vast steel sector, and the iron ore industry feeding it, is grappling with a seemingly contradictory policy impulse that it should produce less this year, even as demand remains strong amid post-pandemic stimulus spending.

China produced a record 1.05 billion tonnes of steel in 2020, helping to drive spot iron ore prices to a one-year peak of $175.40 a tonne on Dec. 21. Over the year, prices rose 75%.

The spot price of benchmark 62% iron ore delivered to North China, as assessed by price reporting agency Argus, has since retreated back below $160 a tonne.

But the price has been above $150 for almost two months, which is a strong performance considering that the steel-making ingredient held below $100 for the five years between May 2014 and May 2019.

While China’s record steel output has played its role, global iron ore supply has also been hit by a series of issues in second-largest exporter Brazil, which has suffered disruptions from the coronavirus pandemic, mine closures on safety grounds and a fire last month at an export terminal.

Top exporter Australia has managed to keep its shipments at robust levels, but this hasn’t been enough to offset the supply losses from Brazil and still meet China’s demand.

The question for market participants is whether China will really curtail steel production in 2021, or whether ongoing stimulus spending will triumph as authorities prioritise economic growth over pollution and energy consumption concerns.

The official line is that steel capacity and output should moderate this year.

Industry and Information Technology Minister Xiao Yaqing called on the steel industry to “resolutely” reduce output and ensure that there is a year-on-year decline in 2021, according to a Dec. 29 report from state news agency Xinhua.

Industry body the China Iron and Steel Association (CISA), however, expects higher steel demand this year amid supportive macroeconomic policies.

To resolve this dilemma of how to cut steel output and still meet demand, CISA is touting imports as a solution.

“We can strengthen imports of primary steel products, especially billets … so that rising demand can be met without increasing output,” CISA Vice Chairman Luo Tiejun told a new conference on Jan. 27.

If China does limit steel output in 2021 and increase imports of steel products, it sets up an intriguing dynamic whereby China’s iron ore imports may drop slightly, while imports by other producers increase by a corresponding amount.

If this occurs it could mean iron ore prices remain supported since demand growth in the rest of the world would offset any decline in China’s imports of the raw material.

DEMAND RECOVERY?

There is already some early signs that seaborne iron ore demand is recovering outside of China.

Global seaborne deliveries in January were an estimated 125.08 million tonnes, according to vessel-tracking and port data compiled by Refinitiv. This figure is likely to be adjusted higher as late-arriving cargoes are included in the assessment.

This was up from December’s 122.67 million tonnes, and while still just lower than November’s 125.18 million tonnes, marked a recovery from pandemic-induced levels below 120 million tonnes in May and June last year.

China’s seaborne imports were estimated at 93.05 million tonnes in January, up from 85.35 million in December, according to Refinitiv. Overall the picture that emerges is that global iron ore demand remains solid, and China has yet to show any meaningful signs of moderation.

There are still some question marks over supply from Brazil, but probably not as many as there were in 2020.

So, does the current situation justify a price above $150 a tonne?

History would suggest not. Certainly the forward curve for Singapore-traded iron ore futures has been slipping in recent weeks, with the six-month contract closing at $138.33 a tonne on Jan. 29, down from $146.48 at the start of the month.

Iron ore inventories at Chinese ports, as monitored by consultancy SteelHome, rose a third week in the period ending Jan. 29, reaching 126.2 million tonnes, up from a two-month low of 124.43 million in the week to Jan. 8.

It’s a cliche to say a market is finely balanced, but in the case of iron ore this seems an apt description, with the outlook dependent on whether the coming months show China is moderating steel production, or if its mills are still running hard.