Column: Iron ore suffers from short-term demand problems, China is at risk in the longer term

A man walks past an iron ore mixing site at the port of Dalian, Liaoning province, China September 21, 2018. Picture taken September 21, 2018. REUTERS/Muyu Xu/File Photo

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LAUNCESTON, Australia, June 20 (Reuters) – The spot price of iron ore has been on a torrid time lately, caught between short-term worries about the economic health of the main Chinese buyer and a longer-term threat to the current market system as Beijing seeks to sustainably reduce costs.

The benchmark 62% iron ore for delivery in North China, as valued by commodity pricing agency Argus, fell to $121.95 a tonne on June 17, the lowest price since Jan 1 and down 24% from the high of $160.30 so far in 2022. Mar 8.

China’s domestic iron ore contract also tumbled, ending last week at 838 yuan ($124.70), down 10.3% from its closing high so far this year of 934 yuan on June 6.

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The immediate catalyst for the sharp declines in recent weeks has been falling profit margins at Chinese steel mills amid a bleak outlook for demand.

Some Chinese steel mills have reportedly cut production, and Sinosteel analysts estimate steel inventories rose by 316,700 tonnes last week to 22.2 million tonnes.

China buys about 70% of the world’s iron ore volumes transported by sea, so any problems with demand for steel will affect the price of iron ore, a raw material for steel.

The lingering effect of COVID-19 lockdowns and the threat of more to come as Beijing sticks to its zero-COVID policy is also casting a shadow over the world’s second-largest economy.

The risk for China is that the current negative sentiment exceeds expectations that Beijing’s stimulus measures will revive the economy in the second half of the year.

The outlook for iron ore spot prices for the rest of the year largely hinges on China’s ability to contain COVID-19 and how quickly stimulus measures begin to boost high-risk activities. steel-intensive such as housing and infrastructure construction and vehicle manufacturing.

Beyond that, the iron ore market may face a potential overhaul of the spot pricing system that has largely been in place since 2008, when former BHP Group (BHP.AX) CEO Marius Kloppers transferred his company, the third in the world. largest producer of iron ore, a far cry from the earlier contract system and the other miners followed.

Chinese iron ore imports versus price

WHO HAS THE POWER?

China wants to set up a central group to control iron ore imports by the end of the year, saying it will give it the power to force lower prices, the Financial Times reported on June 16.

It wasn’t the first time such a plan had been mooted, but the difference this time is that there seems to be real momentum towards a central system of iron ore purchasing by major steel mills controlled by the EU. State.

At first glance, it may seem obvious to try to set the terms of purchase if you are the buyer of 70% of the world’s supply of a commodity.

But while iron ore is a concentrated market on the demand side, it is almost as concentrated on the supply side, with two main producing countries, Australia and Brazil.

For example, Chinese imports from the two countries in May totaled 83.7 million tonnes, or 87% of arrivals by sea, according to data compiled by commodity analysts Kpler.

There are several miners in each country, but, again, the supply is concentrated – between a handful of large companies.

Rio Tinto (RIO.AX), BHP and Fortescue Metals Group (FMG.AX) accounted for 58 million tonnes of Chinese imports in May, or about 61% of the total.

Brazil’s Vale (VALE3.SA) supplied 14 million tonnes of China’s imports in May, for a 14.6% share.

Adding the big three Australian producers to Vale means four companies meet 75.6% of Chinese imports, as May’s import figures are broadly representative of longer-term supply trends.

While these companies are unlikely to collude or form a cartel of sellers, they also wield significant market power.

China could try to reduce its reliance on Australia by looking to buy more from Brazil and the handful of smaller suppliers, such as South Africa and Canada, but miners from those countries would be little incentive to sell at lower prices than their Australian competitors.

Ukraine’s loss of exports since its invasion by Russia and the export ban imposed by the Indian government have further concentrated the maritime iron ore market, making China’s challenges even greater.

If China is really trying to end the current spot system, it may come down to who blinks first in what is likely to become a Mexican standoff.

The opinions expressed here are those of the author, columnist for Reuters.

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Written by Clyde Russell; Editing by Bradley Perrett

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The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and freedom from bias by principles of trust.

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