Why China’s Iron Ore Demand Could Wane in 4Q17
Iron ore demand
China, the largest consumer of iron ore (COMT), contributes more than two-thirds of the world’s seaborne-traded iron ore. Therefore, we can track China’s iron ore imports and the outlook for steel production to gauge the future demand for iron ore.
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China’s iron ore imports
China recorded 88.9 million tons of iron ore imports in August 2017, making it the strongest month for imports in 2017. In the first eight months of the year, imports reached 714.4 million tons, 6.6% higher than in the same period last year. The substitution of domestic ore by imported high-quality, low-impurity ore is the major reason for this increase.
China’s steel production outlook
Overall, Chinese steel production has remained strong, breaking one record after another in 2017. In August, steel production stood at 74.6 million tons, surpassing the previous record set in July. August brought a year-over-year (or YoY) rise of 8.8% and marked the 18th month of increased steel production in China. While higher steel production and higher imports from China bode well for iron ore prices, this scenario could change. As we discussed previously, capacity cuts in China are due to take effect in November, which may put pressure on steel production and the demand for iron ore, impacting its prices. Lower iron ore demand by the world’s largest steel consumer certainly doesn’t bode well for miners (XME) such as BHP Billiton (BHP), Vale (VALE), Cleveland-Cliffs (CLF), or Rio Tinto (RIO).