Can China reduce iron ore imports by 150 mn t in H2 CY'21?

Under the "capacity and output control" policy, China is expected to slash 150 mn t of iron ore imports in H2 CY'21.

According to data from the General Administration of Customs, China imported 746.45 mn t of iron ore in the Jan-Aug'21 period - a yearly decrease of 1.7%. Under the "capacity and output control" policy, what could be China's iron ore imports in H2 of this year?

Steel production controls

According to data furnished by the National Bureau of Statistics (NBS), China's crude steel output was 1.065 bn t in 2020. In H1 CY'21, China produced 563 mn t of crude steel, a y-o-y increase of 59.121 mn t, or 11.8%. If the annual crude steel output in 2021 is required not to exceed that of 2020, the crude steel output in H2 will have remain at about 502 mn t. Therefore, crude steel output in the second half of this year will have to decrease by at least 64 mn t, y-o-y.

Since Jul, Shandong, Hebei, Jiangsu, Liaoning, Jiangxi and other major steel producing provinces are moving towards reducing production. According to NBS data, in Jul'21 China's crude steel output was 86.79 mn t, a y-o-y decrease of 8.4%, while in Jun crude steel output witnessed growth. So, there has been a "sudden brake" in China's crude steel production in Jul.

The China Iron and Steel Association (CISA) has suggested that the steel industry should limit capacity that has been illegally added since 2016 as well as the capacity replacement that failed to follow standard procedures. The output of iron and steel with poor level of environmental protection or treatment, or the output of non-standard enterprises, should be limited and output through the blast furnace route should be limited.

However, no limit to steel production capacity of enterprises meeting ultra-low emissions requirements has been fixed, and there is no limit for EAF mills. The direction in H2 of this year basically conforms to these guidelines.

The reduction of millions of tonnes of crude steel in H2 is expected from the BF-BOF route. The main sources of iron in converter smelting are blast furnace-produced molten iron and scrap.

Scrap & domestic concentrates

According to data released by the China Association of Metal Utilization and Scrap (CAMU), in H1 CY'21, the national consumption of steel scrap was about 137.95 mn t, a y-o-y increase of 44.2 mn t, or 47.15%. In H2 of 2020, the consumption of the same was 138.95 mn t, an increase of 21.1% on year. Applying the same y-o-y growth rate, the consumption of steel scrap will reach 168.13 mn t in H2 CY'21 - an increase of 29.18 mn t over H2 CY'20.

Now, if crude steel output in 2021 remains at the same level as that of 2020, taking into account 64 mn t of crude steel reduction from the long route and additional scrap consumption of 29.18 mn t, equivalent to 29.18 mn t of crude steel, it means that the actual production of molten iron needs to be reduced by 93.18 mn t, equivalent to 149.08 mn t of Fe 62% iron ore (1:6 ratio).

Now, if we factor in the increase in Chinese domestic iron concentrate production by 1.5 mn t this year, the actual import of iron ore can be reduced by about 150.58 mn t. Assuming that the iron ore import rate remains same vis-a-vis last year, (623 mn t in H2 of 2020), the import volume can be reduced by about 24% y-o-y in H2 of 2021.

If crude steel output in 2021 is reduced by another 20 mn t on the basis of 2020, then the long process steelmaking will be reduced by 84 mn t. Considering that scrap consumption is increased by another 29.18 mn t, equivalent to 29.18 mn t of crude steel, it means that the actual production of molten metal will be 113.18 mn t, equivalent to 181.08 mn t of Fe 62% grade iron ore, and if domestic iron concentrate is increased by 1.5 mn t, then after conversion, the actual imports of iron ore can be reduced by about 182.58 mn t.