Analysis of Iron Ore Market under Output Reduction of Crude Steel

SHANGHAI, May (SMM) - The National Development and Reform Commission said on April 19 that they will continue to carry out the nationwide production reduction of crude steel so as to guide steel enterprises to abandon the extensive development method of winning by quantity, and promote the high-quality development of the steel industry. In the process of reducing crude steel output, the National Development and Reform Commission will adhere to "one general principle and two key points". The general principle is to firmly grasp the general keynote of "steadiness" and "seeking progress while maintaining stability". While maintaining the continuity and stability of the supply-side structural reform policy in the steel industry, we must adhere to the principles of marketisation and the rule of law, give play to the role of market mechanisms, stimulate enterprises, and actively, strictly implement relevant laws and regulations on environmental protection, energy consumption, safety, land use, etc. Highlighting two key points is to insist on distinguishing the situation to avoid "one method fits all", and focus on reducing crude steel production in key areas for air pollution prevention and control such as Beijing-Tianjin-Hebei and surrounding areas, the Yangtze River Delta region, and the Fenwei Plain. The key objects are to reduce crude steel output with poor environmental performance, high energy consumption, and relatively backward technology and equipment.
According to the scenario analysis of the reduction of crude steel output by the National Development and Reform Commission, there is no pressure to reduce crude steel output throughout the year. In order to ensure the target for next year, steel mills that can produce normally still try their best to keep the output level with last year.
Affected by the Winter Olympics and the pandemic, the blast furnace operating rate of northern steel mills was low from February to March this year, and pig iron production from January to March 2022 decreased by 14.97 million mt year-on-year. The crude steel output was 20,000 mt in April 2022. The pig iron output was 76.78 million mt with daily output of 2.48 million mt. As the total production of pig iron in 2021 was 856 million mt and the production of pig iron from January to April in 2022 was 280 million mt, it is expected that the peak pig iron production in May-December 2022 will be 584 million mt. Based on this calculation, the average monthly peak and the daily average peaks are expected to be 72.97 million mt and 2.38 million mt respectively. Assuming that the crude steel output in 2022 will decrease by 10 million mt and 20 million mt year-on-year, the average daily output of pig iron from May to December is expected to be 2.36 million mt and 2.31 million mt,  lower than that of April. Considering there are factors such as environmental protection and production restrictions in the heating season  of northern region in Q4, the pig iron output will actually be lower than that in the second and third quarters. SMM believes that this policy has little impact on the production of pig iron in the second and third quarters, but if the current production maintained, the production pressure in the fourth quarter will be greater, and production will inevitably be reduced.
As of the early-May, 17 overseas mines have announced their output in the first quarter. Judging from the production of these 17 mines, the output of iron ore in 2022 Q1 was 301 million mt, a decrease of 14% month-on-month and a year-on-year decrease of 5%. Both production and shipments declined, and the shipments of some mines were postponed to the second quarter amid the impact of hurricanes, rainy season, and the Russian-Ukrainian war in the first quarter. Therefore, the shipments of overseas mines will increase significantly in the second quarter. The planned output of major mines in 2022 has generally increased, and some expansion plans are expected to start production by the end of 2022, which will bring supply pressure in 2023.
Judging from the new target output of the four major mines in 2022 Q1, except for FMG's adjustment of the annual target, the others maintained the original target. The output growth of the four major mines in 2022 is relatively limited. Australia's MRL is expected to increase by 300 mt, and Anglo American (Brazil and South Africa) is expected to increase by 4 million mt. In addition, because prices in Q1 was high, some small mines in Australia and Brazil, and non-mainstream mines in Africa and India also began to mine and ship. However, due to the pandemic and other reasons, the actual increase was relatively limited. SMM believes that iron ore overseas production and shipments have increased since the second quarter, and the supply of iron ore in 2022 is relatively loose.
In the first quarter of 2022, the total volume of shipments from Australia to Pakistan was 284.38 million mt, a significant decrease from the previous quarter, but basically the same as the same period last year. After entering the second quarter, as the weather began to improve, the shipment volume of Australia and Pakistan continued to increase with a year-on-year increase of 5%. It is expected that the arrivals to Hong Kong will increase slightly in May, or will be higher than the same period last year.
In February 2022, iron ore prices continued to rise despite weak demand. The National Development and Reform Commission interviewed large domestic iron ore traders and carried out supervision in the later stage. As a result, the enthusiasm of traders to acquire goods was frustrated, resulting in a decrease in port trade volume. The SHFE/LME price spread of iron ore expanded, and the landing cost of goods priced at US dollar was high. Steel mills were more inclined to purchase spot goods in ports, and ports inventories declined rapidly. According to SMM research, port inventories decreased by 10.34 million mt in April. Affected by hurricanes and torrential rains, arrivals to Hong Kong dropped significantly in Q1 2022. However, it began to improve in April. At present, the shipments from Australia and Pakistan have returned to normal levels. It is expected that the arrival volume in May will increase significantly, and the decline speed of the port inventories will slow down, which will weaken the price support.
The "Cornerstone Plan" of China Iron and Steel Association suggest to use 2-3 "five-year plans" to effectively change the source composition of China's iron resources, fundamentally solve the problem of resource shortcomings in the iron and steel industry chain, so as to reduce iron ore Stone foreign dependence. The plan proposes that by 2025, domestic mine production and overseas equity mines will reach 370 million mt and 220 million mt respectively, an increase of 100 million mt over 2020. However, judging from the production situation since the beginning of this year, due to the impact of the pandemic, the cumulative output of domestic iron concentrates from January to April 2022 was 82 million mt, a year-on-year decrease of 2% and the resumption of production in many mines was delayed by 1-2 months. However, from January to March this year, the investment in fixed assets in the ferrous metal mining and dressing industry increased by 89.8% year-on-year. Many new projects have already started construction. For example, Xi'anshan, a 10 million mt mine, has started construction. In addition, large-scale iron ore projects, such as Sishanling Iron Mine and Macheng Iron Mine, will be put into production this year and next year. Whether the increase of 100 million mt can be achieved by 2025 depends on the future price trend of iron ore and the availability of mine funds
According to SMM research, after March, the steel mills started to make losses. Up to now, EAF steel mills have suffered losses to varying degrees. In order to save costs, some steel mills prefer to use low-priced and low-grade iron ore, hence SSF with better stability is preferred. As the price of SSF continued to climb, the price difference between low and medium-grade narrowed from 360 in early March to 210 yuan. In the short term, the purchase of low-grade ores will continue to increase, but FMG's discount on low-grade ores dropped sharply in May. As a result, it is expected that steel mills' purchases of SSF may decrease.
As coke prices continued to rise, the profits of steel mills continued to shrink, hence the demand for lump ore and pellets has dropped significantly. As a result, lump ore premiums and pellet premiums began to decline and are expected to continue to decline in the second quarter.
In 2022 Q1, under the influence of macro expectations, policy regulation, the Russian-Ukrainian war and the pandemic, the price of mines fluctuated greatly. Since April 2022, overseas shipments began to increase, so that domestic ore supply gradually increased. But the current production of steel mills is close to a high level, hence iron ore supply is expected to tend to be in excess. In May, it is expected that the price of iron ore will increase, while in the medium and long-term, the ore prices may decline.