Early this week, iron ore prices jumped to $116 a tonne, rising to a 7-week high. The rally was substantially based on China’s import data that was interpreted as increasing demand for iron ore. Expectations from fiscal policy measures, including rate reduction in China, also played a part in giving a boost to the sentiment.

Iron ore is a key input for steel-making. To be sure, China is the world’s largest and dominant producer of steel, accounting for half of global production of about 1,800 million tonnes (mt).

In November, the Asian major’s iron ore imports broke the 100-mt mark, growing by well over 7 per cent year-on-year. This is the highest in the last 13 months. The surge in demand propelled the iron ore market higher by about 8 per cent to around $ 110/t last month. This raised the spectre of firm market prices.

If anything, the iron ore market is set to soften from the current levels for two significant reasons, both of which involve China. China has decisively moved from investment-led growth to consumption-led growth. Fixed-asset investment is slowing. As construction activity slows, demand for steel is sure to be impacted.

Portends are ominous. Environmental concerns have forced the Chinese government to clamp down on excess steel production. At the same time, iron ore stocks in China are rising, having expanded by a fifth since the beginning of this year.

Slowing construction activity in China is a matter of concern. The recent episode involving a major construction firm has only exacerbated the concerns. For developers, funding of construction projects has become more difficult now.

From the supply side, China’s steel production is most unlikely to rebound as the government announced plans to reduce steel output in 2021 as compared with the previous year. Outdated and environmentally inefficient steel mills have been targeted. This would translate to lower steel production and, thereby, lower consumption of iron ore. .

Ironically, despite the recent surge, iron ore prices are still just about half of what they were earlier this year in May. On current reckoning, the upside price risk to this key raw material is rather limited, while correction holds promise.

In sum, the iron ore market is set for a correction as developments in China are sure to weigh on prices. A 20-30 per cent price decline cannot be ruled out in 2022, but the process will be gradual and somewhat non-linear.

India is among the largest producers and consumers of iron ore. Its iron ore production reached 246 mt in 2019-20; but declined to 204 mt because of the national lockdown due to the Covid-19 pandemic. For the current year 2021-22, supply is projected at 250 mt and demand at 181 mt.

(The author is a policy commentator and commodities market specialist. Views are personal)

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