The iron ore complex was distinctly weak on Friday March 19, 2021. Iron ore prices fell sharply. Paper markets fell just as far. Conversely, steel eased thought had a good weak offering some hope. CISA steel output fell back from its crazed pace in early March:
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At least rising steel and falling iron ore is lifting Chinese steel mill margins, which opens the possibility of continued restocking of raw materials.
Yet, even so, China is clearly aiming to squash this market. The Friday trigger was big news out of Tangshan, from Argus:
China’s major steel-producing city of Tangshan has announced curbs on steelmaking operations at 23 mills because of environmental violations, sending iron ore futures sharply lower but boosting hot-rolled coil (HRC) futures today.
The Tangshan restrictions, contained in a draft document released today, will apply from 20 March to 31 December and penalise mills that have failed to meet emission control targets so far this year.
…”According to my calculation, the production cut will lead to about a 28mn t decrease in pig iron and 45mn t decrease in iron ore demand for this year,” a Hebei mill manager said.
In theory, this should hit iron ore prices and lift steel prices. But, whenever authorities have done this before it has always lifted both as improved steel mill margins kept raw material purchases robust. So, the jury is out. What it will certainly do is lift demand for better quality ore over lower.
There are a range of other headwinds building too:
- China property starts had a poor start to the year, down nearly 10% versus 2019 (a better comparison than 2020).
- Chinese catch-up growth (the pig in the python) is going to exhaust itself over 2021.
- Credit is tightening, especially for property developers.
- China has lifted scrap import bans for the first time in years and will be sourcing as much as possible (accelerated by pollution controls)
- May is a very weak seasonal period as rains disrupt building in southern China.
- Post Q1 ends weather supply risk in Brazil and Pilbara.
- Vale and everybody else is normalising the volumes.
Time to exit stage left this market.