SINGAPORE – Steel production in China, the world’s biggest supplier, will probably contract this year and shrink further in 2017 as local demand slows, hurting the outlook for iron-ore, according to Li Xinchuang, a vicechairperson at the China Iron & Steel Association.

“There will be significant declines in the next three months,” said Li, who’s also dean of the China Metallurgical Industry Planning & Research Institute. “If steel consumption and production are set to decline, then there’ll definitely be less demand for iron-ore,” Li said in a phone interview on Wednesday.

China’s vast army of mills, which make half the world’s steel, was busier than ever on a daily basis in June as local demand held firm and exports were sustained at near-record levels. Still, year-to-date output remains lower than in 2015, and Li’s outlook suggests further weakness ahead. Steel output this year will continue to drop from a year ago, according to Li, who has more than 30 years’ of experience in the industry.

“Our original estimate was for a 3% decline this year,” he said from Beijing. “Based on how things have played out this year, I think the decline in output might be less than anticipated but the downtrend remains unchanged.” He added: “ iron-ore should be on a downtrend, not on an uptrend.”

IRON'S RALLY
Iron-ore with 62% content delivered to Qingdao has soared 42% in 2016 to $61.70 a dry ton on Wednesday, according to Metal Bulletin. It’s risen in tandem with steel prices in China, with rebar rising more than 40% in Shanghai after a run of five annual declines. Still, futures for both sagged in China on Thursday as iron-ore in Dalian lost as much as 5.9%.

Li’s outlook for a drop in iron-ore chimes with a chorus of predictions from Citigroup to UBS Group that prices are set to ease, with Morgan Stanley targeting a slump back to $40 a ton this half. Among the reasons cited are a weakening of demand coupled with rising low-cost mine supply.

When 2016 began, there were plenty of predictions that steel output in China was set to post a significant drop, extending the fall seen in 2015, when production fell 2.3% to 804-million tons for the first loss in decades. That’s not yet come to pass, with production proving resilient as the government boosted stimulus and mills won overseas orders. In the first seven months, steelmakers made 466.5-million tons, down just 0.5% from 2015.

'TOO CLOSE TO CALL'
"It’s still too close to call on whether steel output will fall this year because mills are still eking out profits,” said Dang Man, an analyst at Maike Futures Co. in Xi’an. “As long as prices remain supported, either by government-ordered cuts or stable demand, they’ll have little incentive to reduce supply.”

While exports of steel from China have helped to buoy demand for iron-ore this year, there isn’t much room for further increases above an annual rate of about 100-million tons, said Li. The global steel market is saturated and Chinese mills now face stiffer opposition to shipments, he said.

“Annual volumes will probably remain above 100-million tons, but we’re past the period of high growth,” said Li, whose institute advises the government and steel mills. “With steel demand contracting and exports growth slowing, how can steel output possibly increase? It’s very unlikely.”