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How China’s Weakening Fundamentals Could Impact Cleveland-Cliffs

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Direct seaborne exposure is over

Cleveland-Cliffs (CLF) ended its direct seaborne iron ore exposure through the sale of its Asia-Pacific iron ore assets to Mineral Resources on August 28. Now, CLF is mainly a US-based (DIA)(IVV) iron ore pellet producer. However, seaborne iron ore prices still affect it indirectly.

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Chinese iron ore demand waning

China consumes more than 70% of seaborne-traded iron ore, so China’s imports are the largest factor affecting seaborne iron ore prices. According to Reuters, China’s iron ore imports fell for the first time in 2018 since 2010. The country imported 1.064 billion tons of iron ore in 2018, implying a YoY fall of 1%. In December, China’s iron ore imports came in at 86.65 million tons, implying an increase of 2.8% YoY. Its imports were almost flat sequentially.

Chinese steel demand outlook is weak

As the profit margins at Chinese steel mills have started to contract, restocking demand has been weak. Most market participants agree that China’s iron ore imports will increase at a very slow growth rate in the years ahead, mainly due to the high base as well as the general steel overcapacity in the country. US-China (QQQ)(MCHI) trade issues are also expected to affect the Chinese economy, which could lead to an impact on all sectors.

In the next part, we’ll look at the demand indicators for China steel demand.

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