Despite a ‘very good’ balance between supply and demand for the iron ore market, Rio Tinto CEO Jakob Stausholm on Bloomberg said that the mining group remains cautiously optimistic about the global economy and how China can affect this.
During the interview, Stausholm said that although certain crises are cooling down the world economy, there is still high demand in the physical economy, especially with the energy transition efforts.
“There’s no doubt that the fight against covid in China has had an impact, very short term, on the Chinese economy but China is very determined and seems very convinced that they will be able to meet their growth targets and they’re not right now accelerating the infrastructure investments. And when they accelerate their infrastructure investment it’s good for all demand, so I remain cautiously optimistic,” he said.
According to the preliminary data released by the U.S. Geological Survey (USGS), 900 million tonnes of usable iron ore were mined in 2021, with Australia being the largest iron ore producing country, followed by Brazil (380 million tonnes), China (360 million tonnes), and India (240 million tonnes).
Over the next five years, Australian iron ore production is expected to grow at a Compound Annual Growth (CAGR) of 2.6% to reach 1.04 billion tonnes in 2026.
Iron Ore price fell in April 2022 to a current level of 151.25, down from 152.07 last month and 179.83 one year ago. This is a change of -0.54% from the previous month and -15.89% from one year ago. Iron ore prices fell amid fears of the increasing number of cases of COVID-19 in Beijing, China.
The price of the said commodity is expected to rise with the anticipated reopening of Shanghai from the COVID-19 lockdown. The city is placed under a normalized epidemic-control phase that will allow some industries to operate and people in “low-risk” areas to physically report to work.
Iron Ore is expected to trade at 121.40 USD/MT by the end of this quarter, according to Trading Economics’ global macro models and analysts expectations.
Demand for iron ore increasing in china
Iron prices may remain above $100 if real estate investment rebounds more than expected or the constraint on steel production is weaker than expected, China International Capital Corp. analysts Zhilu Wang and Chaohui Guo said in a note.
According to the Metals Market Index (MMI), “the demand for iron ore is stable and increasing, and steel mills have not reduced production due to losses and high inventories, and ore prices have strong support.”
“However, considering the inflated or policy intervention of ore prices, it is expected that mineral prices will continue to operate in a wide range in the short term,” its report said.
The ongoing Ukraine situation and China’s lockdown measures against COVID-19 remain among the hurdles for the metal industry’s sought for expansion this year, not sparing the chain supply of iron ores, a raw material for steel production. Iron ore supply may continue to dampen as logistics services endure disruptions.
Steel industry in China falling behind in production
China’s economy has been robust over the last few decades, but this is slowing. China’s capital, Beijing, may face a broad lockdown as authorities seek to slash further community transmission of the COVID-19. The Chinese steel industry is already falling behind in its steel production. In Tangshan, the city responsible for around 15% of China’s total steel output, the COVID-19 lockdown resulted in an estimated daily production loss of 30,000-35,000 tonnes in March 2022.
China has the world’s largest market for steel. China has also become the world’s largest importer of iron, accounting for 60% of worldwide trade in 2020. Even with this tremendous development going on, China Iron and Steel Association said the growth and demand for steel in China shrank to 8% in 2020 and is expected to shrink by another 4% this year.
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On one hand, according to Platts assessments, steel prices in China fluctuated between Yuan 4,420/mt and Yuan 6,680/mt in 2021, with an annual average of Yuan 5,320/mt. Steel price in China is expected in 2022 to range between around Yuan 4,000/mt and Yuan 5,500 /mt.
S&P Global earlier this year issued its outlook for China’s steel sector noting that “markets are expected to see less volatility in 2022 as similar tough output cuts are unlikely to this year.”
“The fluctuation in steel prices is expected to narrow, but average annual prices may drop a notch due to sluggish demand in general,” the report says.
Steel prices from China have been on the rise along with the increase in demand for it. However, S&P Global said that China’s property development is expected to be sluggish in 2022, thereby affecting its domestic demand.
Ensuring a reliable supply chain
China Metallurgical Industry Planning and Research Institute (MPI) also noted in its previous outlook that Steel demand in China is expected to slip to 947 million tonnes from last year’s 954 million tonnes.
With woes on the security of supply for different commodities, Stausholm said that Western countries are now cultivating means to ensure a reliable supply chain by starting to explore their own backyard.
“Things are not booming and they shouldn’t be booming because it’s a difficult world. It’s difficult to get the supply chains to work perfectly with all the disruption we have in the world,” he said
“Maybe we in the West sometimes have relied too much just on the market. And what I see now is governments and big companies are much more focused on How can we ensure that we have a very reliable supply chain, which should come as no surprise. When you have as many disruptions as you have at some point it becomes a problem for your business.”
Even so, Stausholm clarified that their ties with China remain firm. “The good thing about doing business in China is that the Chinese people think very, very long term. The business leaders think very long term. We made our first joint venture with China in 1985. And we keep on not just selling to China but also making partnerships, making joint ventures.”