Demand from China for Australian iron ore could be slipping as imports fell for the fourth consecutive month by volume, although tense diplomatic relations might not be to blame.
New Covid outbreaks in 17 Chinese provinces causing construction restrictions, a slowdown in manufacturing and a goal to reduce emissions could all be contributing to a drop in China’s need for Australia’s most valuable commodity.
Some analysts believe the latest trade data also shows the Chinese government’s directive to lower steel production was starting to bite on iron ore demand, which could be bad news for Australia’s economy.
Iron imports by volume fell to 88.51 million tonnes in July compared with 89.41 million the previous month, according to China’s trade data. This was a drop of 21 per cent compared to the previous year where imports of iron ore hit a record high of 112.6 million, data from MySteel revealed.
Iron ore prices have already moved sharply lower in the last fortnight on the prospect of weaker demand from China, said Commonwealth Bank Australia’s mining and energy economist Vivek Dhar.
“The weakness isn’t tied so much to steel demand easing in China (but) as policy-driven cuts to China’s steel production in the second half of 2021. Policymakers are looking to keep steel production in 2021 at 2020 levels in order to keep a lid on emissions,” he told news.com.au.
“China’s steel sector accounts for more than 15 per cent of China’s carbon emissions and will have to play a key role in helping China reach net zero emissions by 2060.
“For China’s crude steel production to remain flat this year, we would need to see a 12 per cent yearly cut to China’s crude steel production in the second half of 2021. That will weigh heavily on China’s iron ore imports for the remainder of the year.”
Steel mills in partcular regions in China have been ordered to cut production by 50 per cent so as to cap steel production below last year’s record high with officials pledging to aggressively enforce restrictions, Westpac analysts also noted.
Drop in demand
The drop in iron ore demand can be charted since March where China imported 102.1 million tonnes of iron ore that month, followed by 98.56 million tonnes in April, 89.79 million tonnes in May and 89.41 million tonnes in June.
Iron ore prices, which have been trading around $US172 a tonne are now well below May’s high of $US237. However, these record prices helped to boost Australia’s profits despite a drop in imports.