What Does the Iron Ore Demand Outlook Mean for Cliffs?



Iron ore demand

While the price of iron ore rallied in 2016, not many market participants are optimistic about the rally’s longevity. Supply-demand fundamentals are expected to catch up with the commodity’s price as more supply starts coming online in 2017.

Vale (VALE) has already started commercial production at its 90-million-tons-per-year project, S11D.

As for demand, China consumes more than two-thirds of seaborne iron ore. Tracking China’s iron ore demand is vital for iron ore investors.

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China’s iron ore imports

China’s 2016 iron ore imports came in at 1.0 billion tons, an annual rise of 7.5%. The rise was the result of the following two factors:

  • resilient steel demand in China, partly driven by government stimulus measures
  • the replacement of Chinese domestic iron ore production by the import of cheaper high-grade ore imports, mainly from Australia and Brazil

Higher prices and the usual slowdown leading into the winter months could lead to softer demand for iron ore. Less demand will be negative for iron ore prices. However, in the long term, as China shuts down its steel capacity, which mostly uses scrap metal, iron ore imports could see an upside. However, this upside could balance out if the demand from other sectors such as construction falters.

China’s steel production outlook

China (FXI) (MCHI) produced 739.5 million tons of steel in the first 11 months of 2016. That’s a 1.2% rise, which wasn’t what many market participants predicted at the start of the year. Most expected steel production to fall in 2016.

Many market participants are now predicting volume falls in 2017. Hebei, China’s main steel-producing province, has increased its capacity-cutting targets for 2017. It has announced a cut of ~32.0 million tons of steelmaking capacity in 2017.

Another factor is that inventories at ports have reached 12-year highs, and the property market might finally take a breather as the People’s Bank of China starts tightening. But that doesn’t seem to be going the way of ever-increasing iron ore supplies.

The above-mentioned factors could result in lower iron ore imports from seaborne players such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale (VALE), and Cliffs Natural Resources (CLF).


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