Iron ore has in
recent memory performed extraordinarily poorly in the second half thanks to a
recent cycle of unfettered steel output in the first half of the year in China
followed by a string of Government controls to keep output falling ever so
slightly.
It means output has
to be far weaker in the last six months, something that was confirmed by
Chinese steelmaker Baosteel last week.
“This year, there
is still the policy to keep steel output flat, and the output this year will
not exceed last year’s level,” GM Wu Xiaodi said reporting the company’s
earnings last week.
The drop will
likely be between 30-40Mt.
That is worth
looking out for, given Baosteel is plenty connected. Part of China’s
State-owned Baowu Group, the steelmaker has stakes in iron ore projects in
Australia and elsewhere, including a role in the development of the Simandou
mine championed by Rio Tinto
(ASX:RIO) in Guinea.
The aims of the
policy are largely read as environmental in nature.
Steel is one of the
main emitters in China, and globally the industry contributes around 7-8% of
the world’s CO2 emissions.
China currently
produces almost 60% of the world’s steel largely through the blast furnace
method, which uses met coal and iron ore to produce crude steel, sold primarily
in two products, rebar and hot rolled coil.
While other, less
carbon intensive forms of steelmaking exist, like electric arc furnaces, they
aren’t in high penetration in China due to the age of its industry and a lack
of scrap steel supply.
Additionally, when
power prices are high it can cause China to idle EAF output. By 2025 China
plans to lift EAF’s share of steel production from around 5% to 15% and further
to 20% by 2030.
But prices continue to rage
Supply of seaborne
iron ore continues to increase as well.
According to
MySteel, August 28 to September 3 saw the fourth straight week of shipment increases out of Australia and
Brazil.
Aussies shipped
3.9% more taking their supply to 18.9Mt for the week, with global seaborne
trade up 1.3% to 27.6Mt.
Yet traders are
looking longingly at the demand side of the equation.
For the first time
in five months prices eclipsed the US$115/t barrier in Singapore, hitting
US$117/t briefly yesterday before falling back to US$115.30/t when we put down
out pens.
ANZ’s Adam Boyton
pinpointed a string of property support measures, which include lowering
deposit requirements nationwide along with planned rate cuts as the backbone of
the iron ore revival.
“Sentiment was more
buoyant in the iron ore market following last week’s property measures, with
futures pushing above USD115/t in Singapore,” he said, noting the steel
sector’s plans to reduce production still hovered over iron ore fundamentals.
“However, the
spectre of production cuts continues to hang over the market. China’s largest
steel maker, Baoshan, reaffirmed Beijing’s policy to keep this year’s steel
production flat or slightly lower than last year.
“However, in the
seven months to July, output is up 3%. With the industry seeing the worst
profit levels in over a decade, cuts may come over early Q4 when increasing
construction activity brings better prices.”
There was some joy
from China’s PMI reading in August, with the non-manufacturing PMI growing from
51.2 in July to 53.8 in August.
On the ASX all the
focus in recent days in iron ore has been on the revolving door at Andrew
Forrest’s Fortescue (ASX:FMG), where its two most senior iron ore
executives exited stage left after just months with the company.
It comes as the
major shareholder and executive chairman tries to bed down a massive shift in
focus to become a major green energy producer, something that is currently
seeing hundreds of millions in cash redirected each year from its iron ore
earnings into green energy arm Fortescue Future Industries.
What may have
slipped under the radar was a little sell-off from another big (but far more
modest) iron ore chairman in Champion Iron’s
(ASX:CIA) Michael O’Keeffe.
The $3 billion
stock has been on a decent run of late. It runs the high grade magnetite
operations at Bloom Lake in Canada, where it is ramping up to a full run rate
of 15Mtpa after a Phase 2 expansion.
The 2 million share
sale by O’Keefe on August 31 will net the CIA exec chair $11.9m.
The next leg of
their growth appears to be an FID on a decision to produce 69% Fe direct
reduced iron grade iron ore from Bloom Lake from 2025, which would make the
company a major supplier to DR plants, able to produce steel at half the CO2
intensity of a basic oxygen furnace.
The company noted
in a presentation today that just 2.3Bt of iron ore of DR grade has been
produced historically. Six times that will be needed to be produced by 2050 to
help reduce steel industry emissions, a 348Mtpa market equivalent to 40
“average scale mines”.