Chinese iron ore production is falling despite recent strength in prices

Jie Zhao / Corbis via Getty Images

While it’s been hammered over the past month, spot iron ore prices enjoyed a strong rally from mid-June to early September.

However, even with higher prices, it wasn’t enough to see Chinese iron ore producers boost their output levels.

Indeed, as seen in the chart below from Macquarie Bank, rather than encouraging a lift in production, output actually fell.

Source: Macquarie Bank

“We estimate that Chinese apparent production fell to 155 million tonnes [on an annualised basis] in August, the lowest level since December 2016,” says Macquarie.

“Domestic iron ore production has continued to decline over Q3 despite the price rally amid tight environmental and safety checks. This reinforces our view that Chinese mines have lost price responsiveness, with high cost seaborne supply increasingly playing the role of marginal supplier instead.”

The vast bulk of Chinese production is for high-cost, lower-grade ore.

With Chinese regulators implementing environmental controls on steel production, and with steel prices holding at elevated levels, mills have shown a preference towards using more efficient higher grade seaborne supply in recent months, perhaps explaining the lack of reaction in Chinese iron ore output despite price incentives.

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