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Will China’s Weak Winter Iron Ore Demand Hurt Iron Ore Prices?

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Iron ore demand

Since China is the biggest consumer of seaborne iron ore (COMT), investors looking for clues about iron ore prices should track Chinese iron ore demand. In this article, we’ll discuss iron ore imports and Chinese steel production in an effort to gauge the future outlook.

China’s iron ore imports

While, overall, China’s imports have remained strong in almost all of 2017, October 2017 wasn’t that month. In October 2017, China’s iron ore imports fell to 79.5 million tons, the lowest level in more than a year. Market participants feel that volumes were hit by the winter heating season as well as the National People’s Congress Meeting. We need to look at the data for a few more months to ascertain whether this is a temporary phenomenon or the start of a new trend. Another trend to keep an eye on would be the current “flight to quality,” meaning a switch from lower-grade to higher-grade material. This switch would have consequences on the pricing differential between benchmark and high-grade ore versus sub–benchmark-grade ore.

China’s steel production outlook

China’s steel production has also remained quite strong in 2017. In October 2017, China’s steel production grew 6.2% year-over-year (or YoY), coming in at 72.4 million tons. Year-to-date, steel production in China saw growth of 5.3% compared to the same period last year. Going forward, however, China’s production is expected to fall as the steel capacity cuts take effect. The country is expected to cut capacity by ~50 million tons in 2017.

Moreover, steel demand in China wanes during the winter, which might also entail lower production.

Despite the lower production outlook, miners (XME) producing higher content ore such as BHP (BHP), Rio Tinto (RIO), and Vale (VALE) could benefit from higher premiums. However, miners producing lower-than-benchmark-grade ore—such as Cleveland-Cliffs (CLF) and Fortescue Metals Group (FSUGY)—could expect discounted prices.

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