As the producer of half the world’s steel, China has a major impact on the demand and to a lesser extent the price of iron ore. After growing by less than 1% last year, the slow-down in crude steel production in the country has turned into a decline with production in the first four months of this year being more than 1% below that of the same period of 2014. Chinese exports during the same period are 33% higher than in the same period in 2014 in response to lower domestic demand.
Internal Chinese demand is forecast to fall further in 2015 with World Steel Dynamics suggest a reduction of 6%, which equates to 45 million tonnes and will prompt a decision by Chinese steel makers of whether to increase exports even further or reduce output. Given the current high level of Chinese exports and the growing number of trade barriers being erected it is likely that production will be cut.
At a time of increasing iron ore production as new mining investments come on stream, a decline in the demand for iron ore from China could exert significant further downward pressure on the already depressed iron ore price which fell by 50% during 2014 and by a further 17% in Q1 this year.
The downward pressure on the iron ore price as a result of lower Chinese crude steel production could be reduced, however, if the Chinese opt to curtail production of high cost/low quality domestic ore and switch to imports. There are already signs that this trend has begun as despite the small 1% decline in crude steel production during 2014, Chinese iron ore imports increased by 14% to just over 933 million tonnes. Likewise, in the first four months of this year, iron ore imports grew by 1% year on year despite the decline in crude steel production.
The sourcing strategy of Chinese steelmakers is likely to be a significant component of iron ore pricing. ISSB has is establishing a monitor, a preliminary copy of which is attached, which plots quarterly trends in Chinese crude steel production and Chinese imports of iron ore.