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Iron-ore market likely to stay in oversupply

22nd July 2016

By: Robyn Wilkinson

Features Reporter

  

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Despite China’s commitment to reducing its crude steel production capacity, the iron-ore market remains oversupplied and this is unlikely to change in the foreseeable future, says engineering consultant Core Consultants CEO Lara Smith.

She notes that weak steel demand, the commissioning of new low-cost iron-ore projects by British-Australian miner Rio Tinto and Anglo-Australian miner BHP Billiton, and reservations among high-cost iron-ore producers about shutting down operations continue to plague the market internationally. Although steel producers did try to cut costs and reduce their stockholding at the beginning of the year, Smith explains that, unless steel demand begins to rise soon, these attempts will have been fruitless.

Smith highlights that the outlook for steel demand remains focused on China, which has committed to reducing its steel production capacity. China plans to eliminate about 45-million tons of crude steel production capacity this year, following the announcement by China’s State Council in February that the country’s central government wants to cut 100-million tons to 150-million tons of production capacity by the end of 2020.

“However, based on historic precedence and . . . that new capacity additions are still being planned, these targets seem unlikely to be reached,” she says.

Further, Smith points out that, even if China does meet these reduction targets, China currently has a production capacity in excess of 400-million tons and so, eliminating 45-million tons this year will constitute only a marginal reduction.

Smith highlights that, in general, overcapacity tends to drive overproduction. “These two aspects are inextricably linked. Capacity additions are still ongoing in China, not for economic and long-term market viability, but as a means of creating employment and ensuring social stability in the country. “This is not going to change. “The elimination of significant capacity will necessitate job creation elsewhere and, at present, there does not seem to be an alternative.”

She further elaborates that low iron-ore prices should trigger a net fall in supply; however, many iron-ore majors are ramping up new production and they are expected to keep raising their output until 2020. An estimated 36% of iron-ore production is lossmaking, so there is room for further cutbacks to offset supply from new cheaper operations.

Smith predicts that, based on the intention of many iron-ore majors to ramp up production, coupled with China’s unlikely proposed decrease in steel capacity, iron-ore prices will remain below $50/t, with a downward bias.

“There may be some short rallies in demand during restocking cycles, but even if prices exceed $50/t during those times, we don’t expect that it will be sustainable,” she concludes.

China was the world’s largest iron-ore producer in 2015, producing 1.38-billion tons of metal. The country also imports iron-ore from Australia, Brazil, South Africa and Ukraine. In the first half of 2016, Australia and Brazil together accounted for 87.8% of China’s iron-ore imports. South Africa accounted for 3.9% of the market share, with 16.01-million tons of iron-ore exported to China. This is down from the 4.7% market share that South Africa held for the same period in 2015.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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