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Why China’s Higher Iron Ore Demand Could Increase Discounts

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Jan. 9 2018, Updated 10:33 a.m. ET

Iron ore demand

While analyzing iron ore demand, it is vital to track Chinese demand, since it consumes more than half of the seaborne-traded iron ore (COMT). In this article, we’ll discuss iron ore imports and Chinese steel production to assess its future outlook.

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China’s iron ore imports

China imported 94.5 million tons of iron ore in November 2017, which is an increase of 2.8% year-over-year (or YoY) and 18.9% sequentially. November’s imports were also the fifth-highest on record.

For the January–November 2017 period, its imports were 6.0% higher YoY at 991.0 million tons. In 2018, China should surpass last year’s import record of ~1.0 billion tons.

The capacity cuts ordered by Chinese authorities have motivated Chinese mills to use more imported ore, which is of higher quality than the domestically available ore and causes less pollution.

China’s steel production outlook

China’s steel production declined in November 2017, when it fell 8.6% month-over-month to ~66.2 million tons. This is the lowest output achieved by the country in the last nine months. While its November output was lower, it remained strong throughout the rest of 2017.

For the first 11 months of the year, its production has increased 5.7% YoY. Going forward, however, its production could come under slight pressure as winter capacity cuts are in place until mid-March 2018. Moreover, steel demand in China wanes during the winter, which could also entail lower production.

While iron ore prices could come under near-term pressure due to slower production growth, pent-up demand should drive up prices after the winter cuts are over. Big miners (XME) such as BHP (BHP), Rio Tinto (RIO), and Vale (VALE) should continue to 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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