Insight - Iron ore outlook more bullish than lower China GDP target suggests

China’s iron ore imports have had a steady start to the year, with Refinitiv estimating arrivals at 83.69 million tonnes in February and 86.14 million in January, roughly in line with the 88.4 million from December and the 89.29 million from November. (File pic show Iron ore transported by train in Australia.)

CHINA’S lowering of its economic growth target for 2022 to 5.5% seems at first glance to be bearish for iron ore prices, but there are others factors at play likely to keep upward pressure on the steel raw material.

There is little doubt that China, the world’s second-biggest economy and biggest importer of commodities, is facing headwinds, both domestic and global.

It’s not surprising that Premier Li Keqiang lowered the growth target from 2021’s 6% (although the economy actually expanded 8.1%) in his report to the annual session of parliament.

China’s priority for 2022 is “economic stability,” Li said, and it’s those words that are likely quite bullish for iron ore.

Already China is cutting interest rates, local governments are starting to boost infrastructure spending, and tax cuts are expected – all positive demand drivers for steel.

China’s iron ore imports have had a steady start to the year, with Refinitiv estimating arrivals at 83.69 million tonnes in February and 86.14 million in January, roughly in line with the 88.4 million from December and the 89.29 million from November.

Iron ore imports have held up in the first two months of 2022 despite restrictions on steel output as the authorities in Beijing sought to limit pollution over winter and during the Winter Olympic Games in the city.

Now that these restrictions are ending and stimulus measures are starting to flow into China’s economy, it’s likely that steel demand will rise, thus lifting iron ore imports in coming months.

Overall, the domestic backdrop looks constructive for iron ore despite the lower economic growth target, given that the likely composition of China’s growth will be steel-intensive.

External factors may also be aligning for stronger steel production in China, given the ongoing, and worsening, crisis created by Russia’s invasion of Ukraine.

Both Russia and Ukraine are significant exporters of iron ore and steel products, a trade likely to disappear in coming months.

Ukraine will be unable to export because of the war, and Russia’s shipments will likely face difficulties as buyers self-sanction trade with Russia amid outrage at the violence being inflicted on Ukraine, as well as challenges arranging payment, transport and insurance for commodity purchases.

Ukraine exported 2.92 million tonnes of iron ore in January and 3.27 million in December, according to commodity consultants Kpler.

Monthly shipments range from around 1.8 million tonnes to about 3.7 million in the past two years, the data show.

Russia’s exports of iron ore are smaller, typically no more than 500,000 tonnes a month, however, its shipments of steel tend to average slightly more than one million tonnes per month.

The loss of Ukrainian iron ore exports is relatively small, but will force buyers to look elsewhere, with European steel mills likely turning to Atlantic basin shippers such as Brazil, and South Africa, while Asian importers will try to source more from top exporter Australia, and perhaps second-tier producers such as Iran and India.

Ukraine’s exports to China were 1.3 million tonnes in January and 1.96 million in December, according to Kpler.

Losing that supply will tighten the market somewhat in China, which buys about 70% of global seaborne iron ore.

In other words, the absence of Ukrainian cargoes isn’t as big a deal for iron ore as is the loss of Russian crude for the oil market, but it does matter and is bullish for the price.

The loss of Russian steel exports, and the possibility that European steel producers will find it hard to maintain output amid high energy prices and the possibility of interrupted supplies, will serve to tighten the global steel market.

China is one of the few producers with the capacity to increase steel production, and if the authorities are willing to allow the increased pollution from the coal-intensive process, it’s possible that Chinese steel mills will want to boost production and lift exports.

Positive backdrop

With the positive backdrop for iron ore, the spot price for benchmark 62% ore delivered to north China, as assessed by commodity price reporting agency Argus, has climbed in recent weeks, ending at US$151.40 (RM633) a tonne on March 4.

This was up from the pre-Ukraine invasion low of US$130.75 (RM546) a tonne on Feb 17, and just shy of the US$153.55 (RM642) peak, hit on both March 3 and Feb 10, which was the highest close since August last year.

However, iron ore’s recent rally is modest compared to other commodities affected by the Ukraine crisis, such as crude oil, natural gas and wheat, and the steel ingredient remains well short of the record US$235.55 (RM984) a tonne from May last year.

While a rally back to those levels seems unlikely given the current state of supply and demand fundamentals, there does appear scope for further gains. — Reuters

Clyde Russell is a columnist for Reuters. The views expressed here are the writer’s own.

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