A familiar story is playing out in China this October, and it could have ramifications for the global iron ore price. Despite several rounds of economic stimuli not having the desired effect and the consumption of steel remaining at record lows, China is on the way to importing record volumes of iron ore this month.
Along with coking coal, iron ore is one of the crucial raw materials in steel-making. News agency Reuters reports that China is likely to buy about 120 million metric tons of ore in October alone. It’s happened in the past, and it’s about to happen again. In fact, current estimates indicate that the country purchases almost three-quarters of all seaborne ore.
The news sent iron ore futures on an upward trajectory Monday. However, the uncertainty over the extent of the steel market’s recovery ultimately curbed the gains.
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Iron Ore Imports Contrast with Steel Demand and Exports
According to initial figures, the Chinese Customs Department expects iron ore imports to see a significant rise from the official September customs figure of 104.1 MT. The increase could potentially set a new record, surpassing the previous peak of 112.7 MT in July 2020.
This strong demand contrasts with the continued weakness in steel production. The latter declined for the fourth straight month in September, reaching 77.07 MT — a drop of 1.1% from August and 6.1% compared to September 2023. Meanwhile, projections say China’s steel exports will hit 90-100 MT, down from the previous forecast of 110 MT for 2024.
Low Iron Ore Price or Misleading Enthusiasm?
The question then is: why are the Chinese importing so much ore despite a continued decline in steel production? Some experts have tried to answer this puzzling query. Their analysis attributes the need for iron to a combination of factors.
Part of the answer lies in the introduction of new stimulus measures aimed at boosting the economy. At such times, market sentiment increases due to a perceived boom, and steel companies then rush to stockpile iron ore in anticipation of future demand. Next is the relatively low iron ore price. A lot of buying happens when ore prices drop since low prices make buying particularly attractive to steel mills and traders.
Another reason could be the stockpiling of the ore by traders who keep anticipating an economic recovery, which leads to an increase in steel production and use in infrastructure projects. Combined, these factors have resulted in a situation where Chinese iron ore imports continue to rise even as steel production remains subdued.
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China Continues to Try and Boost its Economy
Meanwhile, last Monday, China cut down its benchmark lending rates during the monthly review, following previous policy rate cuts as part of a macro stimulus effort aimed at kickstarting the economy. This move helped to lift the commodities market, including steel and iron ore.
However, lingering uncertainty about how quickly demand will rise in response to the stimulus served to temper the price increases. One Reuters report quoted analysts at ANZ as saying that while efforts to reduce inventory may accelerate recovery, the short-term impact on steel and iron demand will be minimal.
By and large, global iron ore prices have been decreasing due to the lack of signs that the world’s biggest consumer may finally see an economic recover. The recent decline in the iron ore price only underscores broader uncertainties in industrial commodities, which some analysts say could have a ripple effect on global markets. With China’s construction activity slowing, demand for steel and its key inputs continues to falter, potentially signaling a shift in global trade patterns.
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