China’s push for blue skies and eliminating inefficient and illegal producers continues to take its toll on Chinese iron ore output.
Posted on Twitter by Robert Rennie, Head of Financial Market Strategy at Westpac Bank, it shows domestic iron ore production in China has fallen sharply over the past year, slumping to the lowest level in a decade on a seasonally-adjusted basis.
Compared to major seaborne iron ore producers, especially in Brazil and Australia, the vast majority of Chinese mines produce ore with low iron content.
Given China’s push to improve air quality in northern parts of the country — especially during winter months — has seen Chinese steel mills favour higher quality, more efficient ore over the past couple of years, contributing to a widening price discount between low and high grade ores.
Elevated steel mill margins — helped by the shuttering of inefficient steel producers in China and continued strength in steel demand — has also been a factor behind the divergence in prices across the grades.
With demand and prices for lower quality ore weak, it’s clearly taken its toll on Chinese production levels, a structural change that appears unlikely to reverse in the foreseeable future.
That’s good news for seaborne iron ore producers, especially should Chinese steel production and demand remain strong in the period ahead.
“[The decline in Chinese production levels], coupled with softer imports, has left overall iron ore supply at five-year lows,” Rennie says.
“[This] argues that prices should be well supported.”
You can follow Robert on Twitter here. He’s definitely worth the follow for those with an interest in commodity markets.
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