Commodities

Iron ore prices drop to 3-month low as China curbs steel output

Subramani Ra Mancombu Chennai | Updated on August 10, 2021

Decline in global rate benefits Indian steel sector as NMDC cuts ore prices

Iron prices have dropped to a near three-month low as China’s imports have dropped following its move to control steel production during the current half to meet carbon emission norms.

Iron ore with 63.5 per cent ferrous content ruled at $167 a tonne on Tuesday, down from a peak of $230.2 on May 12 this year. Iron ore with 62 per cent ferrous content quoted at $173.52 a tonne down from $231 in May and also last month.

The global drop in iron prices has benefited the Indian user industry, mainly steel firms, with the National Mineral Development Corporation, the country’s largest iron ore producer, reducing lump ore prices by ₹300 a tonne and that of fines by ₹200 to ₹7,150 and ₹6,160, respectively.

It is for the second consecutive time that NMDC has cut iron ore prices since July.

Major reason

A major reason for iron prices to decline is fears of the Chinese government controlling steel production in the next few months. Reports say that Beijing has asked 20 steel mills in Tangshan city to suspend operations at some of their units for a week ending Tuesday.

The order was to help meet the norms for reducing carbon emissions. The Chinese steel sector makes up 15 per cent of the total carbon emissions by the Communist country.

One of the world’s top five producers Shagang Group, located in Jiangsu province, has said that it was cutting its steel output to comply with its government’s efforts to cut carbon emissions. It has been asked to reduce its overseas sale of steel products by 50 per cent.

Imports below 100 mt

The company produced 41.6 million tonnes (mt) of crude steel last year. A further indication of Chinese steel production declining is data showing that iron ore imports into China from Australia slipped for the fourth consecutive month in June.

The drop in imports is seen in sync with the Chinese efforts to control steel production and keep it at last year’s level. China’s iron ore imports dropped to 88.51 mt in July compared with 89.41 mt in June. Shipments have been below 100 mt since March, when imports were recorded at 102.1 mt.

Iron ore prices have rallied since the last quarter of 2020 in tune with the commodity prices’ rally as developed nations came up with monetary measures to strengthen demand.

Brazilian pressure

In addition, production in the world’s largest producer Vale in Brazil was affected following a dam burst. Vale said improvements have been made to dam safety, which points to an increase in production.

The Brazilian firm said that its ore production capacity had increased to 330 mt per annum during the June quarter. This is also putting pressure on iron ore prices.

Analysts are of the view that iron ore has peaked during May-June and its prices are headed south for the rest of the year. Chinese analysts and investment banks have been betting on the ore prices dropping on the back of a fall in steel production growth.

The Chinese Iron and Steel Association has projected a slower growth in steel production during the current half compared with the first half this year. This augurs well for Indian steel user industries, which have been affected by the surge in ore prices since November last year.

Published on August 10, 2021

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