Chinese steel capacity eliminations and new era of environmental restrictions are impacting the global iron ore market, with crude steel production and iron ore imports expected to decline by CAGRs of 1.14% and 2.52% respectively between 2018-2022. This is turn is leading to a shift by iron ore producers to produce higher grade iron ore.
The Chinese steel boom, which started in early 2000’s, has largely shaped the global iron ore market. With the vast majority of domestic mines producing low grade iron ore with an average Fe grade of 30% and below, steel makers have depended on imports of high grade iron ore (Fe 58-62%) from Australia and Brazil, with Chinese iron ore imports during the period 2005-2017 growing by a CAGR of 21.38%. In 2017, China imported 1.07 billion tonnes (bnt) of iron ore, of which Australia accounted for 62% followed by Brazil with 31%.
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The trouble for the iron ore import boom started brewing in 2016. Under the 13th Five-Year Plan (2016-2021), the Chinese government set a target to eliminate 150 million tonnes (Mt) of low quality and heavy polluting steel capacities. In 2016, China removed 65Mt of steel capacity and a further 50Mt in 2017. For 2018, the Chinese government has targeted eliminating 30Mt of capacity and mandated no new capacity.
In addition, the government’s new “Blue Sky” environmental initiative (2018-2020) has been introduced to reduce the air pollution. This three-year action plan focuses on winter production cuts across major steel producing regions, including the Beijing-Tianjin-Hebei region and neighboring areas which accounted for 27% of the country’s crude steel output in 2017. Production cutbacks in winter from November to March, could keep 55Mt of capacity idle for a period of 120 days each year. Taking a step further, one the biggest steel producing cities of Tangshan in the Hebei province has ordered an extension of winter production cuts to extend through to the summer. During summer cuts, it has ordered a halt to 15% of mill capacity within the city radius, while the other cities have to keep 10% – 15% of their capacity idle based on an assessment by the local authorities. Even though the current reductions may not affect the country’s crude steel output significantly in 2018, they show clear intent by the government to keep more capacity idle in order to achieve the target of reducing pollution.
Government policy to eliminate the inefficient steel capacities and shift in the steel makers focus towards high grade iron ore is impacting the major low grade iron ore exporters, such as Fortescue Metals Group, Australia’s largest low grade iron exporter. The company suffered a revenue loss of 18% during FY18, with its current product mix ranging from FE 56-59 suffering with reducing demand from China. To overcome the situation, Fortescue is focusing on producing higher grade iron (FE 60) ore, with a new 30 million tonnes per annum (mtpa) mine, Eliwana, in Western Australia’s Pilbara region expected to start commercial scale production by July 2019. At the same time, another Australian low-grade iron ore miner, Cleveland-Cliffs, has closed 11Mt of iron ore production, whilst, in June 2018, BHP announced a $2.9bn investment in its South Flank iron ore project to improve the average grade of iron ore from FE 61 to 62.
Chinese iron ore imports vs Chinese crude steel production (Mt), 2005 – 2022
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