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Cleveland-Cliffs: China Iron Ore Demand Strong, Low Grades Suffer

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Iron ore demand

China’s demand for seaborne iron ore dictates the commodity’s price because it consumes more than 70% of 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

While China’s imports fell 11% year-over-year (or YoY) in December 2017 to 84.3 tons, for the whole year, they increased 5% YoY to 1,075 million tons. This figure also represented the highest-ever annual imports for the country. Strong domestic steel prices encouraged mills to produce ore. Moreover, China’s switch from lower-grade ore to high-quality ore necessitated higher imports, which usually have higher iron ore content than domestic ore.

China’s steel production outlook

China’s steel production in 2017 remained strong. Overall in 2017, China’s steel production was 4.4% higher than 2016. Its steel production in December 2017 was 67.05 million tons, 0.3% lower YoY. The production has somewhat seen a negative fallout in China due to steel production capacity cuts to curb pollution in the winter. Production cuts are in place until the middle of March 2018. They could mean that production will see further weakness, at least until then.

While this could mean that iron ore prices could come under near-term pressure, 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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