China’s challenge with iron ore

Iron ore prices have remained volatile since hitting a record high in May 2021. With uncertainties persisting on both the supply and demand side, price fluctuations look set to continue.
China’s Iron Ore Dependency
China is the world’s largest consumer of iron ore, and despite being the third largest producer, it still imports around 80% of the iron ore it uses each year. The biggest producers of iron ore are Australia, Brazil and China, which collectively account for around two-thirds of global output.
China imported a total of 1.12 billion tons of iron ore in 2021, down slightly from 1.17 billion tons in 2020, according to government data. The drop in demand was largely driven by lower steel production in China, as the government placed constraints on the industry in a bid to reduce carbon emissions.
Going forward, China’s demand for steel, and by extension iron ore, could be impacted by conflicting factors. On the one hand, the country’s zero-COVID policy could lead to ongoing lockdowns, particularly in the face of the highly contagious omicron variant, which would impact economic activity and reduce demand. On the other hand, with data for March 2022 pointing to slowing economic growth, the government is set to introduce stimulus measures to boost the economy. The Communist Party’s Politburo recently stressed the importance of meeting annual economic goals, and increasing infrastructure construction to help boost growth. A rise in infrastructure construction would boost demand for steel, and its raw ingredient, iron ore.
Over the medium term, China has set the goal of significantly increasing its iron ore self-sufficiency. In the 2021-25 Raw Material Development Plan, it set out plans to increase domestic mining and raising the use of scrap steel. Until this goal is achieved, China remains heavily dependent on imports, with 60% of shipments coming from Australia.
Price Volatility Drivers
Iron ore prices have been volatile since hitting a record level in May 2021, when they reached $237 per metric ton (MT) on the back of rising demand from China. In November 2021, they slumped below $100 per MT, before recovering to a seven-month high in March 2022.
On the supply side, prices had gained some support due to concerns about production. Australia has seen a fall in its iron ore output due to labor shortages, partly as a result of Omicron outbreaks.
At the same time, the onset of war in Ukraine put further upward pressure on iron ore prices in late February to early March 2022 due to its impact on exports from both Russia and Ukraine. Ukraine accounted for 3% of global iron ore production in 2021, but exports have been disrupted by the military action. Meanwhile, western producers have also been seeking alternative suppliers amid economic sanctions.
Despite these supporting factors, iron ore prices have continued to be volatile in recent weeks, with fluctuations partly driven by changing expectations for demand as China continues to pursue its zero-COVID strategy.
The Portside and Seaborne Spread
Price volatility extends to the spread between China’s seaborne and portside iron ore market. Seaborne iron ore has a lead time of one to two months and reflects future supply/demand, with prices quoted in U.S. dollars per dry metric ton. By contrast, portside iron ore has a shorter lead time, typically of just a few days, meaning its price reflects the current supply/demand situation, while prices are quoted in renminbi (RMB) per wet metric ton, with VAT and port fees included in the price.
The portside market has been growing in importance in recent years both for price discovery, as the portside market reflects domestic demand more closely, and direct RMB-denominated sales of landed cargoes by international companies. Another advantage is that trading of portside iron ore can be done for smaller volumes and with less onerous financing arrangements, while the market tends to move faster than the seaborne one, making it more responsive to changes in demand.
The spread between the portside and seaborne market for iron ore can be volatile, due to factors ranging from shipping times, to foreign exchange rates, to financing. In recent weeks the discount of portside prices to seaborne ones has narrowed significantly, largely due to weaker than anticipated demand for iron ore in China following COVID-19 lockdowns. The situation is a significant reversal of much of 2021, when portside iron ore traded at a premium to seaborne, before a build-up of portside stocks triggered the shift to a discount.
Managing Price Risk
CME Group’s Iron Ore China Portside Fines CNH fot Qingdao (Argus) futures and Iron Ore China Portside Fines USD Seaborne Equivalent (Argus) futures are among internationally traded derivatives linked to China’s portside prices with which market participants can manage their onshore iron ore price risk at Qingdao Port in China.
-- Contact us at [email protected]
-
How HK increases competitiveness on path towards normalcy Dr. Winnie Tang
Hong Kong is gradually on road to normalcy from the Covid-19 pandemic but it is difficult for the economy to regain momentum. At a time when people are uncertain about the prospects, the opinion of
-
Counsel of choice Neville Sarony
One critically important element in Hong Kong’s Basic Law is expressed in Article 12 (1) ‘that any person under investigation for the commission of an offence shall have the right to…have competent
-
How much will Hong Kong property rebound this year? Ben Kwok
Call it the little blossoming spring, as the local saying goes. From Sun Hung Kai Properties to its rivals to agents such as Centaline, all honchos would say the property market would go up between
-
Is 2023 a year of expensive travel? Ben Kwok
How much are you willing to pay for your first trip in three years? Well, depending on who and when, it could be quite costly for Hong Kong travellers. Travellers who want to go outside Hong Kong
-
Environmental performance of old buildings needs to be improved Dr. Winnie Tang
At least 500 new buildings are constructed in Hong Kong every year which generates substantial carbon emissions. The construction industry must urgently look for more environmentally friendly