China’s Iron Ore Imports Drop, Will Prices Stay Elevated?

China consumes more than 70% of seaborne-traded iron ore. As a result, iron ore investors should track China’s demand and outlook. Today, China released its trade data for June. China’s iron ore imports were 75.18 million tons in June—9.7% lower YoY (year-over-year) and 10.2% lower month-over-month. In June, China’s imports fell to the lowest level since February 2016.

For the first six months of the year, China imported 499 million tons of iron ore—an increase of 5.9% compared to the same period last year. The imports didn’t decline due to the lower iron ore appetite among Chinese steel mills. China’s imports fell due to restricted supply from Brazil and Australia—the biggest iron ore exporters.

Iron ore’s first major supply disruption this year came after Vale’s (VALE) dam burst in Brazil on January 25. Due to Vale’s own decommissioning and authorities’ restrictions on some of its mines, a significant chunk of the capacity went offline. BHP Billiton (BHP) and Rio Tinto (RIO) also flagged weather-related disruptions. BHP Billiton expects a reduction of 6 million–8 million tons of iron ore for fiscal 2019. So far, Rio Tinto downgraded its production guidance twice this year. Read Rio Tinto’s Production Cut Could Propel Iron Ore Prices to learn more. The disruptions are keeping the supply in check at a time when China’s iron ore demand is strong.

While the supply has been restricted, the demand side is surprisingly firm due to the ongoing US-China trade war. Other commodities, including copper and aluminum, have been impacted by China’s low demand. China’s economic stimulus is also helping the demand side for iron ore.

Since iron ore prices touched multiyear highs, Chinese steel mills sought government intervention to probe higher prices. In Iron Ore: Chinese Steel Mills Urge Probe into Price Spike, we discussed that the CISA (China Iron and Steel Association) asked the government to investigate the sharp spike in iron ore prices. As reported by Reuters, the investigation will see if “non-market factors” are causing higher iron ore prices. According to Reuters, eight steel companies gathered at the CISA on June 27. The companies represent 30% of China’s steel output. The companies discussed the surge in iron ore prices. The prices have increased ~70% YTD (year-to-date).

While part of the YTD surge in iron ore prices seems justified given the tight supply, the commodity seems to be have run too far from the fundamentals. The total supply disruptions represent less than 7% of the total seaborne iron ore supply. Some of the supply is coming back online. For Vale, the Brucutu mine went offline due to the dam burst. On June 22, Vale restarted the mine’s operations.

That being said, a lot of the future price action in the iron ore market will depend on the demand side of the equation. If Chinese steel production stays strong, iron ore prices won’t come down. China’s steel production has risen 10% year-over-year.

However, if there’s a pullback in production in the second half of the year due to the crackdown on pollution or weaker demand sentiment, iron ore prices might take a beating.