Iron Ore Under Strain From China’s Transition

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Growth in China’s seaborne iron ore imports slowed in 2015 to 3%, from an average of 11% p.a. in the 2011-14 period.

While this was a relatively positive result, given that Chinese steel production declined by 2% in 2015, the altered demand environment has nonetheless had a significant impact on iron ore prices, and has resulted in a transition in the dynamics of the seaborne iron ore trade.

Steered By Supply

In the years leading up to 2015, firm growth in Chinese steel production drove a rapid increase in iron ore imports. Imports were boosted further by China’s absorption of any global surplus of low-cost iron ore owing to displacement of domestic ore output. However, growth in Chinese steel production began to wane in 2014 (to 1%, from 13% in 2013). A further drop in production in 2015, combined with a continued ramp up in low-cost ore output from major miners (such as Vale, Rio Tinto, BHP Billiton and FMG), saw spot iron ore prices drop to an 8-year low of $38/tonne by late 2015.

While lower prices had boosted China’s imports in 2014, in 2015 the extent of the weakness in Chinese demand was sufficient to limit the pace of import growth, and low prices exerted severe pressure on miners globally. In Australia, relatively high-cost smaller miners suspended production or restructured, while seaborne exports from countries excluding Australia and Brazil are estimated to have declined by around 20% to 230mt last year.

China’s Sated Hunger

These trends evidenced the shift in iron ore trade last year, to a market in which China is no longer able to absorb all of the global oversupply of iron ore. Looking to 2016, Chinese steel output is expected to fall by another 2% amid the ongoing economic transition. However, some major miners are pushing ahead with expansion plans, including Vale’s S11D project in Brazil, Rio Tinto’s continued developments in the Pilbara, and rising exports from emerging Australian major Roy Hill.

Balancing The Global See-Saw

Growth in shipments from these projects could further augment oversupply of iron ore, and high-cost producers both in smaller exporting countries and China are expected to further reduce output in 2016. Even after the Samarco dam collapse in November 2015, which largely contributed to Vale lowering its 2016 output guidance by around 30mt, and BHP Billiton reducing its 2016 financial year output forecast by 10mt, iron ore production by six major miners is expected to grow by an estimated 2% in 2016. While this is notably slower than the 7% expansion that had been expected in 1H 2015 (see graph), the additional low-cost volumes are still likely to displace shipments from elsewhere, with current projections indicating a drop in global exports from countries other than Australia and Brazil to less than 190mt in 2016.

So, 2016 looks set to be another dramatic year for iron ore trade, with global seaborne volumes expected to fall 1%. Trends in China will remain key, and while closures of domestic iron ore mines could increase China’s reliance on imports, expectations for a further decline in domestic steel consumption suggest that for now, the days of rapid global iron ore trade growth are unlikely to be repeated.

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Source: Clarksons

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