Rocketing Chinese steel output not halted by iron ore supply concerns

Higher iron ore prices in the international market are leading Chinese steel producers, the largest consumers of the input, to find alternative ways to continue increasing their own output, which is skyrocketing, analysts say.

China's crude steel production increased 10% year-on-year to 89.1Mt in May, according to local industry news service Mysteel Global, which cited data from the country's National Bureau of Statistics (NBS).

Furthermore, the Asian giant's steel output in the first five months rose 10.2% year-on-year, according to the report.

"The on-month growth in May was mainly thanks to steel mills' high enthusiasm for production, as the steelmakers wanted to produce as much as possible to guarantee their sales and profits before the country's steel demand enters the traditional off-season starting this month. June-July is when many regions are subject to high temperatures and frequent heavy rains which undermine demand," Mysteel said in a note to clients on Monday.

According to the note, prices for Mysteel's benchmark 62%-Fe imported iron ore fines at local ports steadily increased and reached an average of US$98.7/t in May, up US$5.5/t compared to February.

TIGHT SUPPLY

In a separate report, Mysteel cites China's iron ore market sources to state that, other than the strong demand from Chinese mills, "the global iron ore market has been continuing with the theme of supply stretch ever since the beginning of this year from the crucial supply bases – Australia and Brazil – to all the destinations including China amid adverse weather and accidents."

To deal with the issue, local steel mills are resorting to iron ore inventories at Chinese ports to feed their production lines.

According to a note from London-based shipbrokers Simpson, Spence and Young (SSY) published Thursday, iron ore stockpiles at Chinese ports fell by a further 3.4Mt in the week to 14 June, dropping to 119Mt, the lowest level since January 2017.

"Port stocks have now fallen in nine of the past ten weeks and are down by more than 20Mt since the start of the year," SSY said.

However, a possible recovery in supply from the world's largest producer of the material, Brazil's Vale, is expected for the coming quarters.

Vale said on June 13 that it expects part of its iron ore production halted by court orders following the Minas Gerais dam collapse gradually returning to the market during the rest of the year.

STEEL OUTPUT RESTRICTIONS?

Meanwhile, steel mills in the city of Tangshan in the Chinese steel producing hub of Hebei province were ordered to cut sintering operations by up to 50% in a bid to curb air pollution, according to a Reuters report cited by SSY on Monday.

The production limits imposed by the government are making local producers resort to imports to feed their lines. Metal Bulletin reportedly said on Monday that the Asian nation is importing steel slabs to circumvent the mandatory cuts and escalating iron ore prices in the local market.

"China is importing steel slab from Iran and Brazil to get around production limits placed on blast furnace operations in the country," the report read, citing local industry sources.

According to the report, lower-grade stock slabs from Brazil have been offered to China at a price of around 3,000 yuan/t, including 13% VAT. Iranian slab had recently been sold to China at 3,200 yuan/t, with the same 13% tax.

PRICE AND DEMAND

Mysteel calls the recent strengthening of iron ore prices "phenomenal", as it is not only sentiment-driven but also supported with the remaining strong demand from the Chinese steelmakers.

"In the near term, market sources also expect imported iron ore prices to hover high until Chinese steel mills are detected to decrease their output self-willingly or too low margins force them to do so when the domestic steel demand eases to a certain level," it said.

Crude steel production in China totaled 315Mt in the first four months, up 10.1%, according to industry data. China accounted for 52.5% of total steel produced in the 64 countries taken into account by the World Steel Association (Worldsteel), which together represents about 99% of global production and reported output of 600Mt.