How Iron Ore Demand Is Shaping Up for Cliffs

Cliffs Natural Resources’ (CLF) Asia-Pacific segment is fully exposed to the seaborne iron ore market. Moreover, the long-term contract prices for its US segment include seaborne iron ore prices as one of their variables. That’s why it’s important to track iron ore demand indicators. The demand side is mainly driven by China, which consumes more than two-thirds of seaborne-traded iron ore. Tracking China’s iron ore demand is vital for iron ore investors.

China imported a total of 83.5 million tons of iron ore in February 2017, which represents growth of 13% YoY (year-over-year) and -9.2% month-over-month. This number is also a record for February. The imports for January and February grew 12.6% YoY to 175.3 million tons.

Steel demand growth in 2017 depends on many factors, such as construction sector growth and government stimulus. But China’s crackdown on pollution will likely keep the replacement demand for iron ore in 2017.

China (FXI)(MCHI) produced 808.4 million tons of steel in 2016. It produced 61.2 million tons of steel in February 2017—growth of 4.6% year-over-year. To smooth out the effect of Chinese New Year, usually a combined figure for January and February makes more sense. The combined steel production for the first two months of the year also recorded a jump of 6% YoY.

Many market participants are now predicting volumes to fall in 2017. China has been reeling from overcapacity in the steel industry.

On the supply side, inventories at ports have reached all-time highs. 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 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).