Rediscovering a Taste for Iron Ore Imports?

Six months ago, softening steel prices and weak demand meant that a pronounced cut in Chinese steel production seemed likely. Iron ore imports looked to be on course for a weaker period. However, December’s iron imports were a record 70.9mt and January imports were also pretty firm at 65.5mt. So is the worst now over?
A Weak 2012
Certainly, Chinese macroeconomic signs are encouraging, with growth in industrial production, GDP and output of steel-intensive products improving. There have also been signs that pig iron output for steel production is also beginning to turn around (see Graph of the Month), after softening for much of 2012. Steel prices dropped rapidly in late summer, and radical production cuts seemed imminent. As it turned out, though, the reaction was very controlled and proportionate. In 2H 2012, mills reduced output by just enough to run down steel stocks and support prices.
This had an initial negative effect on iron ore imports, since the steel mills needed less iron ore. However, once steel and iron ore prices stabilized at lower levels, this then rendered China’s higher-cost domestic miners less competitive. Combined with the effect of winter, which makes mining more difficult, domestic iron ore availability was reduced.
The Swing Factor
The graph also shows the estimated ‘call’ on domestic iron ore in terms of standard quality (64% Fe; most raw domestic ore is of lower quality). This is a calculation from the pig-iron production, which is generally considered to be more reliable data than official ore production figures.
What it shows is that, as mills accustomed themselves to prices of $120/t as opposed to $150/t, the production requirement ‘called for’ from domestic ore was reduced. On this basis, it is estimable that about 225mtpa (64% Fe basis) was required from domestic mines in Q3 2012, but that this fell to 110mtpa in Q4. The weaker prices gave imported iron ore an advantage. This helped to produce the strong imports, even though the steel market stayed relatively weak.
At the same time, it seems that the actual demand for international quality iron ore was perhaps greater than the import figures alone suggest. Port stocks have also fallen, to 67mt by February 2013, down from 97mt in mid-2012. This is surprising, given the softening in steel production and weak prices of this period. However, the positioning of the graph’s scales at the approximate ratio of pig iron production per tonne of iron ore reveals why. The only two periods on record when there has been a concerted fall in Chinese port stocks are Q4 2012, and Q4 2008. These are precisely the points when reduced import and domestic supplies have ‘undershot’ a reduction in iron production.
Encouraging Signs
Signs of a macroeconomic improvement in China has raised the possibility of a greater iron ore import requirement driven by fundamental demand. To some extent, the ability of the seaborne market to meet any such improvement is restricted, given supply side problems, notably in India. This could be a severe limiting factor, but for the time being, the short-term outlook for Chinese demand seems brighter than it has for a while.

Source: Clarksons Research Services