Steel oversupply could further clip China's iron ore prices

With the imbalance between finished steel supply and demand in China continuing, any sustained rebound in imported iron ore prices is hard to see in the near term, market sources warn.

Chinese spot and futures prices of iron ore have been tracking downward since mid-April when steelmakers started scaling back steel production in response to prolonged losses, as reported. Prices at the start of this week were buoyed by some market insiders' hopes of an iron ore demand recovery but prices eventually retreated by week's end, Mysteel Global noted.

For example, the most-traded iron ore contract on the Dalian Commodity Exchange for September began increasing from Monday to reach Yuan 724/dmt ($104.2/dmt) by May 10, before sliding back to settle at Yuan 697/dmt when the daytime trading session ended on May 12.

Last week, steelmakers in Fengnan district in Tangshan in North China's Hebei received official notification from local authorities requiring them to ensure that their annual crude steel output total by December this year should be no higher than that of last year, as reported.

Surprisingly, the news of restrictions being maintained on steel production actually cheered the sentiment in China's iron ore market and served to briefly pause the decline in prices, observed a Shanghai-based industry source.

"Some market insiders reasoned that the reinforcement of crude steel output controls would lead finished steel prices to rise - a reversal of fortunes that might prompt steelmakers to beef up production in the coming period to enjoy the healthier margins, with the result that the mills' ore demand might actually increase." she explained.

Meanwhile, steelmakers have recently succeeded in persuading the independent metallurgical coke producers to accept yet another reduction in coke sales prices, the seventh reduction since early April, for a cumulative reduction to Yuan 600-700/tonne mills - another factor helping to lower the mills' production costs, Mysteel Global noted.

In fact, some blast-furnace mills including some in North China's Shanxi have started preparing to bring their furnaces back into operation in coming weeks after maintenance stoppages, because the steelmakers can start earning money when selling finished steel again, the source said.

Nevertheless, "the retreat in iron ore prices these days has shown that realism has returned to the market, as iron ore demand will not rebound persistently should the current recovery in some mills' margins be unsustainable," she pointed out.

If the mills' commitment to voluntarily reducing output begins to weaken and some even pick up the pace of production, the oversupply of finished steel will only worsen. This is because steel consumption will weaken during summer when rain and higher temperatures disrupt outdoor construction work, she elaborated.

Mysteel's latest regular survey among the 247 Chinese BF mills regularly sampled showed that their daily hot metal output averaged 2.39 million tonnes/day over May 5-11, down for the third week but by a smaller 0.5% on week.

Written by Lea Li, liye@mysteel.com

Edited by Zhenqi Yang, yangzhenqi@mysteel.com

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.