Iron ore at risk as China veteran warns steel output to drop

SINGAPORE: Steel production in China, the world’s biggest supplier, will probably contract this year and shrink further in 2017 as local demand slows, hurting the outlook for iron ore, according to Li Xinchuang, a vice chairman at the China Iron & Steel Association.

“There will be significant declines in the next three months,” said Li, who’s also dean of the China Metallurgical Industry Planning & Research Institute. “If steel consumption and production are set to decline, then there’ll definitely be less demand for iron ore,” Li said in a phone interview. China’s vast army of mills, which make half the world’s steel, was busier than ever on a daily basis in June as local demand held firm and exports were sustained at near-record levels. Still, year-to-date output remains lower than in 2015, and Li’s outlook suggests further weakness ahead. Steel output this year will continue to drop from a year ago, according to Li, who has more than 30 years’ of experience in the industry.

“Our original estimate was for a 3 per cent decline this year,” he said from Beijing. “Based on how things have played out this year, I think the decline in output might be less than anticipated but the downtrend remains unchanged.” He added: “Iron ore should be on a downtrend, not on an uptrend.”

Iron ore with 62 per cent content delivered to Qingdao fell 0.4 per cent to $61.44 a dry ton on Thursday, paring its gain this year to 41 per cent, according to Metal Bulletin Ltd. Steel prices also fell, with rebar in Shanghai trimming its 2016 advance to 44 per cent after a run of five annual declines.

Li’s outlook for a drop in iron ore chimes with a chorus of predictions from Citigroup Inc to UBS Group AG that prices are set to ease, with Morgan Stanley targeting a slump back to $40 a ton this half. Among the reasons cited are a weakening of demand coupled with rising low-cost mine supply.

When 2016 began, there were plenty of predictions that steel output in China was set to post a significant drop, extending the fall seen in 2015, when production fell 2.3 per cent to 804 million tonnes for the first loss in decades.