Despite still awful fundamentals:

And terrible newsflow:

China has recently approved a plan to step up domestic iron ore supplies and reduce its reliance on imports of the steelmaking commodity amid rising uncertainties and volatilities in the global market.

According to the National Development and Reform Commission (NDRC), China’s top economic planner, said this week that it met with representatives from the China Iron and Steel Association (CISA) and the Metallurgical Mines’ Association of China to have discussions about accelerating construction of domestic iron ore projects under the “Foundation Plan,” the NDRC said in a statement.

The “Foundation Plan,” proposed by the CISA and aimed at increasing domestic supply of iron ore, has recently been approved by the authority.

As part of the Plan, Chinese companies will source more iron ore from domestic producers and gradually slash imports over the next 10 to 15 years, the CISA told the state-owned Xinhua News Agency in March.

China is the world’s largest iron ore importer and it brought in 1.12 billion tonnes of iron ore in 2021, with foreign reliance at 76%, according to the country’s official data. The imports declined by 3.9% from the previous year, while the average import price jumped by 55% on year to $164 per tonne.

The large volatility in the global iron ore market in recent years have put Chinese steelmakers under huge pressure. In May 2021, China’s benchmark iron ore futures hit a record high of 1,358 yuan per tonne, surging about 110% from the same period in the previous year. In November 2021, iron ore futures fell to as low as 509.5 yuan per tonne, slumping about 60% in half of year.

So far in 2022, the Russia-Ukraine war has sent commodity prices soaring in the global market. As of June 1, China’s iron ore futures hit 905.5 yuan per tonne, surging by nearly 80% from half a year earlier.

The rising prices of raw materials including iron ore have squeezed steelmakers’ profit margins. In the first quarter of the year, the CISA’s member companies, mostly large-sized mills, made 55.3 billion yuan in profits, sliding 26% from a year earlier, and their average profit margin was 3.69%, falling by 1.12 percentage points from a year earlier.

Luo Tiejun, deputy chairman of the CISA, had said in February that China’s domestic iron ore mining has been insufficient and hasn’t built a capacity matching domestic resource reserves, which has resulted in excessive reliance on overseas supplies.

“China’s steel capacity has been growing rapidly in recent years, but resource supply has been neglected,” said Luo. “Domestic iron ore output hit a peak of 1.5 billion tonnes in 2014, before falling to 760 million tonnes in 2018. In recent years, China’s domestic output of iron minerals has been maintained around 270 million tonnes, contributing to about 15% of the country’s crude steel production,” said Luo.

Under the “Foundation Plan”, China will secure the supply of steelmaking resources from three aspects – expanding domestic iron ore mining, accelerating overseas iron ore mining and secure the supply of scrap steel.

China aims to increase domestic iron ore mining, scrap steel consumption and overseas equity mining output to 370 million tonnes, 300 million tonnes and 220 million tonnes, respectively, increasing by 100 million tonnes, 70 million tonnes and 100 million tonnes from the levels seen in 2020, according to the plan.

“Based on the targets, if China’s annual crude steel output remains unchanged at 1.065 million tonnes in 2025, the contribution of domestic iron ore output and scrap steel to crude steel production will rise to 21% and 26%, respectively, both increasing by 6 percentage points from 2020-levels,” said Luo.

An iron ore industry insider told Yuan Talks that, in the recent ten years, China’s domestic iron ore mining has been stalled due to large investment and long investment cycle.

China’s newly added iron ore resources have also been plunging. According to data from the Metallurgical Mines’ Association of China, China’s newly added iron ore resources during the period of 2016 – 2020 totaled 855 million tonnes, slumping 94% from the previous five years.

“The reason that the Foundation Plan was approved and emphasized by the authority is China’s increasing caution over energy supply,” said a steel industry insider. “The geopolitical uncertainties have prompted expectations of tight resource supply and China is forced to consider how to secure alternatives in case of disruptions to overseas supplies.”

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Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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