China’s iron ore imports have fallen for the fourth consecutive month by volume, in the latest sign that Beijing’s restrictions on steel output are sapping demand for Australia’s most valuable export commodity at a time when Scott Morrison is betting on a quick economic recovery.
China’s demand for iron ore is also being clouded by growing concerns about the impact of its worst COVID-19 outbreak since early last year, inflationary pressures and a slowing manufacturing sector on its economic recovery.
While analysts attributed earlier decreases to supply issues from Australia and Brazil, they said on Monday that the latest trade data indicated the Chinese government’s directive to lower steel production was starting to filter through to iron ore volumes.
Any structural change in China’s robust demand for iron ore is bad news for Australia’s mining giants and the broader economy. However, Australia’s imports to China still hit a record high for the first seven months of the year despite Beijing’s restrictions on goods including wine, beef and barley.
China’s latest trade data, released at the weekend, revealed that iron imports by volume fell to 88.51 million tonnes in July compared with 89.41 million the previous month. On a year-by-year basis, imports by volume dived 21 per cent from a record high of 112.6 million a year earlier, according to data published by MySteel.
China’s imports of the main ingredient in steel-making have been falling since March, although some of those reductions were due to supply constraints. China imported 102.1 million tonnes of iron ore in March, 98.56 million tonnes in April, 89.79 million tonnes in May and 89.41 million tonnes in June.
Analysts said the latest data was a sign that government policies designed to lower steel output to meet Xi Jinping’s carbon emissions targets were starting to have an impact. Lower demand was coming at a time when exports from Australia and Brazil were increasing.
“Steel mills in the Shanxi region have been ordered to cut production by 50 per cent so as to cap steel production below last year’s record high with officials pledging to aggressively enforce restrictions,” Westpac analysts wrote on Monday.
Shipments from Brazil, Australia’s only other significant iron ore competitor, were also expected to rise as the South American country seeks to normalise production lost to a series of disruptions, before and during the pandemic.
Westpac economist Robert Rennie said China’s cuts to steel production were part of the story.
“Demand in the first half was super strong, so you would expect some slowing when steel production is capped for the year. Scrap imports are rising and scrap use for steel production will rise too and domestic iron ore production has been rising too. Multiple factors are at work here,” he said.
China has signalled it wants to take the heat out of record commodity prices at the same time it is seeking alternatives to its dependence on Australian iron ore. However, its efforts to punish Australia economically amid diplomatic tensions is not showing any sign of hurting Australian trade so far.
The latest trade data also showed Australia’s overall exports by value to China jumped 37.4 per cent in the seven months to the end of July, to $US93.5 billion ($127.15 billion). This was partly driven by record iron ore prices. While China’s total iron ore imports by volume fell 1.5 per cent year-on-year in the first seven months of 2021, by price it increased a whopping 81.1 per cent.
Iron ore prices, which were trading at $US172.51 a tonne on Monday are now well below May’s high of $US237.57. Fortescue Metals on Monday tumbled 1.3 per cent to $22.76, BHP fell 0.8 per cent to $51.69 and Rio Tinto declined 1.4 per cent to $128.26.
Traders in China have warned officials will be reluctant to build iron ore stockpiles given signals from the government about slow demand and growing concerns about China’s slowing manufacturing sector and the potential impact of the latest COVID-19 outbreak in China on the economy.
China said on Monday that its producer price index (PPI), a measure of factory gate inflation, jumped 9 per cent in July as commodity prices surged. Economists are warning of inflationary pressures at a time when the country’s biggest COVID-19 outbreak since early last year threatens growth.
“The weakness in major commodity important volumes casts some doubts on the strength and sustainability of the infrastructure recovery,” Barclays analyst Yingke Zhou said.
China’s steel output jumped 11.8 per cent in the first half, to 563.3 million tonnes. This means the market is anticipating significant cuts in the second-half to ensure production was not higher for the year.
There have been mixed messages from China in the past fortnight about plans to cut steel production. Steel mills have been winding back production, with the China Iron Steel Association (CISA) predicting output cuts in the second half, while China’s top decision-making body has signalled it did not want the industry to cut too aggressively.
China International Capital Corp (CICC) said in a report that China’s steel production growth would fall year-on-year from the third quarter. The Global Times said in a report on Monday that China’s iron ore import prices jumped 69.5 per cent from January to July, but that prices had peaked.
China’s overall exports for July were softer than expected at 19.3 per cent and imports for the month rose 28.1 per cent. Coal shipments rose in July.
Source: Australian Financial Review