China is on course to buy more than 1bn tonnes of iron ore from overseas producers in 2017, according to figures released this week, as the country’s mills turn to the seaborne market to secure supplies of the steelmaking ingredient.
The world’s leading steel producer imported 94.7m tonnes of iron ore in June, up from 91.5m tonnes in May for a total of 539m tonnes in the first six months of the year, according to customs data.
If that level of buying is sustained in the second half of the year, China’s iron ore imports will exceed last year’s record of 1.024bn tonnes, which will be a boon to big suppliers in Australia, Brazil and South Africa.
The commodity is a key source of profits for some of the world’s biggest mining houses, including Anglo American, BHP Billiton, Vale and Rio Tinto. This year’s higher average price could help boost cash returns to shareholders.
On Friday, South Africa’s Kumba Iron Ore, which is 70 per cent owned by Anglo American, said profits in the first six months of the year had risen 58 per cent, largely because of higher prices.
“We expect the miners to report decent results given stronger-than-expected commodity prices and still benign [spending] trends that should lead to further balance sheet deleveraging,” said analysts at Barclays on Friday. “How the miners allocate surplus capital is the principal question for the results season.”
Helped by the iron ore price, the FTSE All-Share Mining index has risen almost 5 per cent this year, outpacing the oil and gas sector, which is down 12 per cent.
Seaborne iron ore prices have been extremely volatile this year, hitting $95 a tonne in February before falling back to $53 in June on concern that China’s efforts to limit credit growth would hurt demand for steel. As those fears have eased the price has rallied to $65 and is now averaging $73 for the year, against $57 in 2016.
China’s steel mills have cranked up production this year in an attempt to cash in on an unexpected surge in prices. Rebar, the most traded steel construction contract, has risen 34 per cent in 2017 on local exchanges and hit its highest level in three-and-a-half years on Thursday, before profit-taking kicked in.
Steel prices have been propped up by infrastructure spending and Beijing’s determination to rein in excess capacity in its vast steel industry. Production is on course to hit about 830m tonnes.
Analysts said mills in China’s key producing regions were increasingly turning to foreign producers for their iron ore because of a government clampdown on pollution and sintering that was threatening domestic supplies.
In China’s sintering plants, coarse lower grade domestic iron ore is combined with other materials at high temperatures to make a product that can be fed directly into blast furnaces. However, the process is dirty and a major source of pollution.
“It’s increasingly about security of supply,” said Morgan Stanley analyst Tom Price, explaining that steel mills on China’s eastern seaboard and in Hebei province felt they could not rely on local suppliers.
Source: Financial Times