IRON ORE: CHINA STIMULUS PROGRAMME CENTRAL TO IMMEDIATE FUTURE OF STEEL AND IRON ORE

Iron ore market

China stimulus programme central to immediate future of steel and iron ore

Loading iron ore into the Lee A. Tregurtha laker at the Port of Marquette.

Iron ore has a symbiotic relationship with iron and steel. This is because the mineral found in great abundance under the earth in many countries — particularly in Australia, Brazil and China and potentially in some West African states such as Guinea — is solely used in making the ferrous metal. From this, it follows that the demand emanating from the global steel industry will have a major bearing on iron ore prices at any given point.

Of course, the demand/supply balance will also remain an important price determining factor at all times. Since China has an overarching presence in the world steel industry, accounting for over half its capacity, production and consumption with broad dependence on imports of the principal steel-making raw material, a clinching consideration for price movements in the iron ore market will be the volume of mineral buying in the global market by the world’s second-largest economy.

Before dwelling on a more recent development relating to centralized buying of iron ore by China, which accounts for over 70% of the seaborne trade in the mineral, the immediate discussion focus will be the swings in ore prices between optimism and pessimism over the state of economy of that country.

In its June China Economic Update, the World Bank says it has lowered the country’s GDP growth by 0.8 percentage points to 4.3% in view of economic damage caused by the outbreak of Omicron and prolonged lockdowns in parts of China from March to May in pursuance of Beijing’s zero tolerance of the dreaded virus. While the likelihood of re-emergence of Covid-19 is not to be ruled out, the economy, according to the Bank, carries risks stemming from “persistent stress in the real estate sector with wider economywide consequences.”

What is also to be considered is risk vulnerability of China to what happens in the rest of the world. At the same time, the Bank feels that the full year growth could be higher than is currently projected provided there is no recurrence of the pandemic and stimulus programmes are rolled out to support the economy. Hopes for steel and iron ore trade rest on the $200bn fiscal stimulus programme through issuance of special bonds by provincial governments and the funds to be mainly used for real estate and infrastructure work.

Unfortunately, reports are now circulating that local governments facing financial crunch are spending such funds for

Kunal Bose

purposes other than infrastructure development.

Tata Steel CEO and managing director TV Narendran makes the point that the Chinese steel industry in order to reduce its carbon footprint is unlikely to have export focus any longer. That country will make steel largely for the domestic market. But what about rise in steel products exports during May–June? According to Narendran, “that was temporary, a happening more in response to disruptions caused by Covid shutdowns. I expect production cuts by Chinese mills, for they have started losing money at current steel prices after buying metallurgical coal at prevailing high rates.” What Narendran has said about China finds support in its reduced imports of iron ore and production of steel in the first half of 2022.

First, iron ore. China’s General Administration of Customs says the country’s import of 88.969mt (million tonnes) of iron ore and its concentrate in June 2022 was down 3.548mt over May and 0.5% on the corresponding month of 2021. And in the first six months to June 2022, imports of 535.748mt recorded a 4.4% year-on-year fall. However, in July Chinese imports were up 3.1% at 91.24mt from a year earlier. July imports were also 2.6% higher than in June. Analysts wonder if imports rise had links with restarting of some blast furnaces (BFs) idled earlier due to demand fall during Covid lockdowns. According to Chinese metals information provider SMM, a total of 23 BFs resumed operation between 21 July and 1 August.

Earlier explaining the June import fall, SMM said this happened mainly because finished steel products market entered the off-season this year in advance, thanks to the onset of La Niña phenomenon causing demand destroying extreme weather. China has seen the onset of monsoon in the south earlier than usual, while in the north demand in general, including steel products took a hit from the prevailing high temperature. To compound matters for iron ore trade, steel prices are down to the extent that Chinese steelmakers have found it wise to practise production discipline and focus on maintenance. SMM cautions that steel prices are likely to remain low through the off-season with working of steel mills further impaired. Such developments will no doubt leave a negative impact on iron ore trade and also likely on freight rates. If the US and the West as a whole descend into recession and the promised stimulus package to revive economic activities does not materialize soon, then the outlook for both iron ore and steel will remain uninspiring. In the meantime, the Bank of England has given the warning that the UK is heading into a long recession later this year that is to last through to the end of 2023. High energy costs, the Ukrainian war and the anticipated 13% inflation are leading to the long recession in the UK and the rest of Europe and the US will not be spared the agony.

An industry official says: “The 27member European Union, the rest of Western Europe, Russia+CIS+Ukraine and the US are all major steel production centres. All of them have suffered production setbacks in the first six months of 2022 and if recession envelopes these economies, then steel will be a victim along with iron ore, no doubt about that.” The highly resource-rich Russia has an estimated 25bn tonnes of iron ore reserves, found mostly in Siberia and Ural, putting it in a vantage position to progressively grow exports, particularly to China after fulfilling requirements of the domestic steel industry. Traditionally a major supplier of ore to the EU, Russia is on course to raise exports to China, which too is keen to reduce its over-dependence on Australia for iron ore. Holding the world’s third-largest reserves of iron ore, Russia happens to be Europe’s biggest producer of the mineral at around 100mt annually. In the meantime, Ukraine, which is suffering increasing damage to its infrastructure and logistics due to Russian bombing, sold 21.26mt of ore last year or 2.5% of 884mt that Australia shipped.

The World Steel Association informs that global steel production of 158.1mt in June on a year-on year basis was down 5.9%. The 2022 first half production at 949.4mt shows a fall of 5.5% over the corresponding period of the previous year. This could not have been otherwise since China’s first half production of 526.9mt suffered a setback of 6.5mt. In fact, among the major steelmaking countries, only India could lift first half steel production by 8.8% to 63.2m tonnes. This is in sync with the post-Covid general economic recovery and New Delhi pushing development of infrastructure and building construction.

The world’s second-largest steelmaker, India, is self-sufficient in iron ore with production happening in a three-layered structure. First, the federal governmentowned NMDC is the single-largest producer of the steelmaking raw material; second, while Tata Steel and public sector SAIL have captive mines to take care of their entire requirements of ore, other steel majors are acquiring deposits at auctions held by government agencies; and third, there are merchant miners of different sizes.

In their search for raw material security, Indian steel majors are showing aggressiveness in buying iron ore mines, often at unjustifiably high prices. Narendran had occasion to say that as his group was raising steel capacity at a rapid pace both organically and by way of takeover of ailing mills, he would naturally be inclined to expand his iron ore portfolio. But he is not ready to pay fancy prices for new mines. In the meantime, there are quite a few cases where steel groups having won mines at auction by paying high premiums subsequently surrendered them for lack of operation viability. Director General of the Federation of Indian Mineral Industries RK Sharma does not approve of steelmakers expending “resources and energy” in iron ore mining. “Let them be focused on strengthening their industry and leave mining to merchant miners as is the case in the rest of the world,” says Sharma.

Having a single consumption point, that is making of steel and there being overpowering dominance of one single entity that is China, in seaborne trade, it has to be accepted that any concerns about steel demand for a given period will automatically have a disturbing impact on iron ore prices. Daniel Hynes, senior commodity strategist at ANZ, believes that iron ore will remain vulnerable to downside risk in the short term from “weaker steel demand from the construction sector in China. That’s a major headwind for the iron ore price.” After all construction in general, including house building is the single largest consumption point for steel. Commodity price reporting agency Argus informs that the spot price for benchmark 62% ore for delivery to north China climbed to a record high of $235.55 a tonne in May 2021. But since it has sought lower levels reflecting the steel industry’s headwinds

Tata Steel CEO and managing director TV Narendran.

wobbling around $112 a tonne.

This is not surprising since no one knows when once again Chinese steel mills will revive the idled capacity. At the same time, iron ore producers and traders are nervously watching if Western economies, including the US will descend into recession and if that happens how deep will be the bite of that.

The Office of the Chief Economist (OCE) of Australian government has said in a report that Chinese property construction activity that alone constitutes around 30% of the country’s steel demand moved into the slow lane at the start of 2022 as Beijing took corrective steps addressing rising property prices, the sector’s high debt and failure of some groups to service debts. For example, Chinese property giant Evergrande and its subsidiaries have proved to be a serial offender in fulfilling their foreign and domestic debt servicing obligations. Evergrande, which is among the world’s most indebted group, has piled up debt liabilities exceeding $300bn.

Besides stunted GDP growth, imports defying high portside ore inventories have led Zhongzhou Futures analysts to say in a note that the Chinese iron ore market will likely be oversupplied through the second half of 2022. The phenomenon may continue to prevail in the first quarter of 2023. A factor that will have a bearing on ore prices is the continuing high portside inventories — these were found to be around 160mt in midMarch, well above the five-year average and just off multi-year highs. Such inventories have come down since, but at close to 137mt these are high enough to have a bearish price impact. Inventories at current levels, however, provide a buffer for Chinese steelmakers against the risk of tighter market supplies. In any case, their ore requirements remain squeezed by low margins and high inventories of steel products. At July end, however, steel inventories with key producers at 16.59mt fell 2.43mt over the previous month end. At one point this year, Chinese steel inventories rose to 20.5mt.

What is the price outlook for iron ore in the near and long term? Price forecasting of commodities, which react to demand supply dynamics as also economic and political developments — consider fears of recession and fallout of Ukrainian war — is among the riskiest businesses. Australia being the world’s leading producer and exporter of iron ore, with exports having grown by 8mt to 876mt in 2021/22, the OCE production and price guidance is an important reference point for analysts.

The principal points in its June quarterly forecasts are: v Ore prices steadied in recent months in a US$110–140 range on hopes of

Beijing supporting economic activities through stimulus programmes; v Australian earnings from the commodity are to fall from the

‘extraordinary levels’ seen in 2020/21 and 2021/22; v Ongoing recovery in supply from Brazil and production gains in some other countries are to have a bearish impact on prices; and Australia’s export earnings from the

v

commodity are likely to ease from $133bn in 2021/22 to $116bn in 2022/23 and further to $85bn by 2023/24, reflecting progressive price moderation.

Of all the quarters, OCE’s March report alone gives a five-year price outlook for iron ore. The last one says: “Over the outlook to 2027, iron ore prices are projected to decline to lower long-run levels.” The reason cited is major steel producing countries such as the EU, the US and China are undergoing a transition to a “low emissions environment” and in the

process of more modest growth in BF based steelmaking and continued rise in Electric arc furnace (EAF) capacity. Growing introduction of circular economy practices in clean environment conscious steelmaking countries thankfully includes China that generates about the same amount of CO2 as the next four countries combined. Ferrous scrap use through EAFs is found as the fastest route to decarbonization of the steel industry. According to China’s 14th five year plan for a circular economy issued by the National Development & Reform Commission (NDRC), the Chinese steel industry will increase its scrap usage to 320mt by 2025 from 260mt in 2020. But what in the process the industry will have to contend with is the growing coal fired electricity bill that makes EAF running increasingly expensive.

To take care of the problem, China is promoting alternative sources of power, including hydro, solar and wind. WSA says: “Scrap plays a key role in reducing industry emissions and resource consumption. Every tonne of scrap used for steel production avoids the emission of 1.5 tonnes of carbon dioxide, and the consumption of 1.4 tonnes of iron ore, 740kg of coal and 120kg of limestone.”

The global steel industry is using around 2bn tonnes of iron ore, 1bn tonnes of metallurgical coal and 575mt of steel scrap to make about 1.7bn tonnes of crude steel. The US in its commitment to make more and more green steel is now producing 70% of the metal through EAFs. Green steel revolution is also sweeping Europe where nearly 45% of the metal is produced through scrap recycling. Many analysts expect the iron ore market will face demand squeeze as a fallout of more than 100 countries — the majority of these make steel — making commitment to attain carbon neutrality by 2050. In this context, Fastmarkets says while demand in more normal times may buoy steel market, “but decarbonization and the focus on EAF and high-grade materials may negatively impact the iron ore market.” The demand growth for iron ore in India will continue to rise in step with BF-BOF route capacity expansion planned by all steel majors. But at the same time, Narendran, the acknowledged champion of circularity of used metals, is pushing for scientific collection and sorting of scrap and build a chain of EAFs across the country that will boost use of long construction steel.

The growing use of scrap in China and elsewhere will have a moderating impact on iron ore demand growth. But this is to happen when Fitch Solutions has forecast that global mine output growth will average 2.7% over the period 2022-26 compared with –1.3% in the previous five years. That growth rate will lift annual production by 361.7mt in 2026 over the current year. Where will this growth come from? Fitch says Brazil, which has a good number of projects in the pipeline and wherefrom China wants to buy premium quality ore in larger quantities despite higher freight, is to raise production to 473.5mt by 2026 from an expected 409.6mt this year.

Whatever the analytics and research agency may say, much about Brazil production rises will depend on how quickly Vale, the world’s largest producer of iron ore, is able to leave behind the Brumadinho dam collapse, the grimmest environmental disaster the country ever experienced, and regulatory scrutiny. Hopefully, Vale will not have to shut its 30mt Brucutu mine, the biggest in Minas Geras, once again. In the meantime, Vale has said that in the post-Brumadinho disaster and all the repair work since, it should be well placed to target production of up to 400mt in 2022. What gives comfort to Brazilian regulatory authorities is Vale’s declaration that by “by 2023, 70% of our production will be done through dry processing methods that do not require any type of dam.” In the meantime, the Samarco joint venture of BHP Billiton and Vale that was restarted in December 2020 is initially aiming production at 26% of the project capacity of 30.5mt. The target for 2026 is 60% capacity use.

Fitch is foreseeing Australian annual average ore production growth of only 0.4% during 2022–26 that will lift production by just 19.3mt. The world’s most cost-effective ore producer at between $25 and $30 a tonne, Australia may be wary of Chinese demand falling and that is to leave it with considerable idle capacity. Even while political relations remained strained, Australia was responsible for more than 60% of Chinese ore imports of 1.12bn tonnes, down from the previous year’s record high of 1.17bn tonnes. Beijing is discomforted by Australia’s growing military and otherwise growing closeness with the US more recently reflected in Canberra joining Quad and Aukus — this defence partnership will

Operations at South Flank mine in Australia.

allow Australia to build nuclear-powered submarines with US technology. China says Aukus “seriously undermines regional peace and stability and intensifies the arms race in the region.”

The recent Taiwan visit by US House speaker Nancy Pelosi has only helped in deepening Beijing distrust of its by far the largest supplier of iron ore. In the circumstances, it is no surprise that China will seek to reduce its dependence on ore imports from Australia over a period of time by way of raising domestic production; step up purchases from Brazil, South Africa and other ore-exporting countries; develop mines and infrastructure to facilitate egress of iron ore to ports for shipment to Chinese ports; and step up scrap-based steel production.

Among its investments to develop mines abroad to gain security of supply, the biggest one is Simandou iron ore mine in Guinea, which according to Rio Tinto will be able to produce annually 100mt of ore at optimum capacity use. What is more, Simandou ore is of very high quality. For China, challenges to boost production within the country are its high mining cost of around at $90 a tonne and poor quality of ore requiring beneficiation.

In the meantime China, in its search to exercise control on ore purchases commensurate with its size, has recently minted a state-owned outfit China Mineral Resources Group (CMRG) with initial capital of 20bn yuan ($3bn) whose comprehensive mandate includes centralizing buying of iron ore, overseas investments in ore deposits and domestic iron ore exploration, mining and processing. The country has around 500 steelmaking companies and they make their own purchases of raw materials, including iron ore. As against this, there is a great degree of concentration on the side of sellers. Take Australia: production and global trading of ore is dominated by Rio Tinto, BHP and Fortescue Metals. In Brazil, the initiative rests with Vale. Other producing countries from South Africa to India take price guidance from these industry behemoths. To start with, the new official outfit will do ore buying on behalf of government-owned steel giants Baowu Steel, Ansteel, China Minmetals and Shougang. Very likely, in case the unified buying platform is able to drive good price bargaining with iron ore suppliers using its buying muscle, then private steel groups will approach CMRG to also procure the mineral on their behalf.

There is already a high level of concentration on the supply side with four leading miners — three from Australia and one from Brazil — having control over half the world’s iron ore resources. The Financial Times has said in a report that Chinese central buying may start operation by the end of the year in the hope that its clout will give it the power to force cheaper prices. It is highly unlikely in response to the proposed centralized Chinese buying the sellers will form a cartel. In fact, representatives of leading mining groups have said in public and private that what China is planning to do will no doubt be a watershed development in iron ore trade, but finally the market will sort out where the ore prices need to be based on supply and demand. In 2008, the process of migration from long-term contract for iron ore buying to spot purchases happened without much disturbances to the market. (Long term contract was an unfair practice since China’s views were not considered in fixing prices, in spite of it being the largest importer.) Similarly, it is unlikely that this time it will come down to a case of who blinks first — iron ore industry or CMRG. More than one analyst has said centralized buying could lead to inefficiencies, bureaucracy and also corruption. On the other hand, Fortescue CEO Elizabeth Gaines has said her company will stay course on optimizing distribution channels to meet the needs of the Chinese steel industry. That should be of comfort to Beijing.

Mixed fortunes for Brazil’s iron ore market — and for the rest of the world?

Mixed news for iron ore as, although the industry had an excellent year in 2021, this may prove to have been its peak, writes Patrick Knight. Many indicators predict that the future will be less bright than some analysts suggest.

The year 2021 was a record one for the world’s iron ore industry and Brazil’s Vale, (which celebrated its 80th birthday this year) also did extremely well.

Vale produced a record 288mt (million tonnes) of ore in 2021, out of a total Brazilian output of 332.2mt. Of the total produced, 30.5mt was sold on the domestic market, (the majority of that by Vale). This compares with the 23mt (again most sold by Vale) on the domestic market in 2021. Between January and May of 2021, 200mt of ore was produced, while only 114mt has been mined in the same period this year. The 301mt of ore produced at the Carajas mine, left from the port of Ponta da Madeira, most of the remainder left from Tubarao, a small amount used the port of Guaiba.

Of the 332mt of ore exported last year, 199.6mt were produced by Vale. The majority came from the Carajas mine and was shipped from the port of Ponta da Madeira. Most of the rest left from the port of Tubarao, with a small amount leaving from Guaiba.

In the first five months of 2021, 240,000 tonnes was exported, while only 150,000 tonnes was exported in the same period this year.

With high sales and prices, Brazil made a profit of $40 billion in the first quarter of this year (which was 53% less than in the same period of 2021). Prices have fluctuated enormously in recent months. They peaked at a record $200 per tonne in the middle of last year. They then collapsed to about $90 per tonne at the turn of the year, before rising to $165 per tonne in April, and returning to $200 per tonne again in May. Vale plans to increase production from the 320–380mt of the past five years, to 400mt by 2027. All has not been plain sailing. Outbreaks of Covid-19 have had a considerable impact on production, as has inflation and the war in Ukraine. Several mines in Brazil, notably the Itabira mine in Minas Gerais State, have had to shut down for several weeks, as staff were off sick.

Mines in several other countries have also had to cut operations because of the impact of Covid-19. Because of the severe quarantine restrictions in China due to Covid-19, steel production there has been badly affected, so less ore has had to be imported. Stocks of ore are unusually

low in China.

Because of the rains which normally occur at the turn of the year, the rail line linking the Carajas mines to the port of Ponta da Madeira was shut for several weeks.

The impact of Covid-19, as well as the accelerating inflation (partly due to the war in Ukraine) is having a severe impact on the world steel industry, and consequently on iron ore.

The number of motor vehicles made in 2021 was 47% of the number produced in 2020, while sales of most consumer goods was also down. Activity by the construction industry also slowed. Seven per cent 7% less steel was made in January worldwide, as had been in the same month of 2021.

During 2021, Brazil exported 332mt, more than half of which went to China (by far its leading customer). In the first quarter of this year, 64mt was shipped, compared with the 68mt exported in the same period of 2021.

Recent years have seen major innovations. The National Steel Company, a major producer of steel, and also producing all the ore it uses in its own mines, has decided to switch from diesel-powered, to electric vehicles. It has taken delivery of two prototype vehicles from China and plans to convert 64 of the heavy vehicles used to carry ore from the mines to the processing plants, as well as to convert 100 lighter vehicles. It is even considered in some quarters possible that mines will need little manpower to operate in future.

Many new companies are being attracted to Brazil’s prosperous iron ore industry. One of them is the British-owned JBS construction company, a major supplier of equipment for Brazil’s mining industry. JBS has bought two mines adjacent to the Carajas complex. The purchase has been done jointly with Brazil’s Cosan company, (which operates in Brazil’s sugar cane and energy distribution sectors), together with Cosan’s partner Shell. Initially the two mines will produce 2.7mt of ore. But output will soon be increased to 10mt. Cosan has also bought loading facilities from the Chinese owned CCCC company. The Bamin company, which has mines in Bahia state, is to increase output there to 10mt. Bamin’s plant is adjacent to the mines owned in the region the Anglo American company, whose slurry pipeline Bamin will be able to utilize to get ore to the port of Acu.

A trade dispute between Australia and China is under way. But because Australian ore is so important to China (it is responsible for 65% of China’s ore needs), no action has been taken. There are three mining companies in Australia, Fortescu, Broken Hill Property, and Rio Tinto Zinc (RTZ). The largest of them, RTZ, has recently overtaken Vale to become the world’s largest ore exporting company.

Recent years have seen major innovations. The National Steel Company (CSN), a leading Brazilian steel company — and which also mines the ore which provides the company with all its needs — has decided to convert all of its fleet of vehicles from using diesel, to electricity. It has bought several prototype vehicles from China, and in the next few years, will convert 64 of the very heavy vehicles which ferry ore from mine workings to processing plants, as well as 100 smaller vehicles.

Many new companies have been attracted to the mining industry in Brazil in recent years, encouraged by the high price of ore. As well as JBS’s acquisition, with its partner Shell, of the two mines adjacent to the Carajas project, Cosan has also bought loading facilities from the Chinese CCCC logistics company. The Bamin Company in Bahis state, is to increase output at its mine there to 10mt. The Bamin mine is close to that of Anglo American, so Bamin will be able to use Anglo’s slurry pipeline, to get its ore to market.

Although Vale has predicted that it will be producing 400mt by the late 2020s, this in fact looks extremely unlikely. The table shows that production ore in Brazil peaked in 2018. Since then it has fallen to just over 300mt. There are various reasons for this fall. A major one is the increasing availability of scrap. Now that China’s economy is reaching maturity, numerous vehicles (sales of which there are now leading the world) have started to be scrapped, as have a large number of consumer durables. The rate of civil construction, and infrastructure works is falling. Although growth may continue in some underdeveloped parts of the world, notably in Africa, it can be argued that the age of sustained growth has come to an end, and with it the demand for steel. It remains to be seen, of course, but it is a valid hypothesis.

The Itabira mine had to shut down for several weeks due to the impact of Covid-19. Year

Production 2017 372.698 2018 382.526 2019 326.797 2020 317.888 2021 301.549

Source: Sinferbase. (million tonnes) Domestic 26.201 28.940 25. 434 23.216 30.549 Export 346.698 353.587 301.363 294.672 332.166