UBS with the note:
China steel mills restrictions could result in ~75Mt less iron ore demand in 2H…
Press reports suggest China is imposing more restrictive measures on steel production in 2H21 to ensure output is lower y/y and to meet carbon emissions goal. MySteel reports Baowu is drafting its own plan to cut volumes while Rizhao Steel and two other producers in Fujian Province have received orders from the local government to cut output. The extent of the policy is not yet clear as six other producers indicate they have not received the order to cut production; we note this policy would also be at odds with the government’s aim to deflate steel prices (albeit it could result in lower iron ore prices). China crude steel production in Jan-May has increased 13.9% y/y or 58Mt to 473Mt according to the official data. If the government order is enforced, steel output in 2H21 would fall >10% y/y (assuming Jun is +5% y/y as implied by the CISA 10-day data). This would result in pig iron production falling 46Mt (if PI: crude ratio holds) and iron ore demand falling ~75Mt in 2H21 h/h.
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…while iron ore supply is set to lift 65Mt if key producers meet guidance
Based on UBS Evidence Lab data (> Access Dataset), Vale is set to lift shipments ~11% y/y in 2Q21, BHP and FMG are broadly flat y/y, while RIO is down ~12%. To meet the midpoint of its 2021 guidance, RIO has to lift shipments by ~25Mt h/h in 2H21 and Vale by ~40Mt. In total iron ore shipments of the majors are set to lift ~65Mt h/h in 2H.
Iron ore signals: shipments stable, demand good but China steel inventory up
Shipments: We estimate global shipments are +2% YTD in 2021 (> Access Dataset) with AU -2% (BHP -3%, RIO -6%, FMG +1%), SA up 4%, and Brazil +14% (Vale +11%). Over the seven days to 11-Jul, shipments were -9% w/w, dropping below the average of 3Q20 (BR +7% w/w, AU -16% w/w). Demand: China daily pig iron production fell 6% in the 10 days to 30-Jun to ~1.9Mtpd (+10% YTD); global pig iron production is +7% (YTD-May). Inventory: Iron ore inventory at Chinese ports is +2% w/w at 127Mt (~17Mt higher y/y). Trader steel inventory in China is up again w/w which is a concern, while mill inventory declined. UBS view: We are cautious on iron ore prices medium-term as supply is lifting and demand set to moderate (note).
The only problem with this analysis is that every time China cuts steel output, prices rise and the iron ore market immediately tracks them higher.
This has been the case non-stop since China began rationalising its steel sector in 2016. To date, the great price drops in iron ore have happened in tandem with a glut of steel and falling prices.
Which is not to say that this nexus can’t be broken but it hasn’t been yet…