Iron ore prices hit two month lows as demand weakened in the face of policy to reduce China’s steel output as a means to cut emissions.
The spot price fell 2.5% to $US194 a tonne on Thursday, down about 17% from a record high near $US233 in May, while futures in Singapore are down 4.2% to $US182.55 today.
It comes after China’s policy makers flagged plans to keep China’s crude steel production flat in 2021, implying a 12% on year fall in steel output in the second half of 2021.
“We don’t expect China’s crude steel output to contract to that extent, but China’s steel production is now facing more headwinds than slowing steel demand,” says CBA Mining & Energy Commodity strategist, Vivek Dhar.
He also notes that with the diplomatic relationship between Australia and China “still frosty” and concerns are shifting from China restricting or even banning iron ore imports from Australia to accelerating measures to reduce dependence on Australian iron ore.
Those longer-term concerns are “more credible” in his view.
While in the the near term, it would be very challenging for China to move away from its more than 50% dependence on Australian iron ore, Mr Dhar warns that in medium term, China could increase iron ore imports from other countries, boost domestic iron ore supply, increase scrap steel usage and reducing steel production altogether.
He warns that where Australia-China tensions will likely manifest is diversifying China’s iron ore from Australia.
He says Brazil’s iron ore supply can return back to its potential by late 2022, but supply growth after that looks more challenging, but a longer-term option for China is Guinea’s Simandou project.
That’s at least 5 years away and is likely to initially produce 60-80Mt or about 4% of the seaborne market, increasing to potentially 150Mtpa.
“However, we think this supply will likely act as a substitute for high-grade and high-cost domestic concentrate in China, which is likely to keep declining despite efforts to increase local output,” Mr Dhar says.