LAUNCESTON, Australia- China’s iron ore and steel markets are having to juggle several different and contradictory factors in trying to work out whether the current elevated prices are justified.
The two biggest issues are the aim of the government to once again limit steel output this year to a level below that of 2021, while at the same time accelerating economic growth in the second half of the year to meet a 5.5 percent annual target.
At first glance, the call by China’s state planner for a reduction in crude steel output in 2022 seems bearish for iron ore demand, but perhaps bullish for steel prices, especially if there is a supply shortage in the second half of the year.
The National Development and Reform Commission will ensure energy consumption and environmental controls meet requirements, spokesman Meng Wei told a briefing on Tuesday.
“The target is to make sure that national crude steel output will fall in 2022 from a year earlier,” said Meng, adding that key areas for cuts include Beijing-Tianjin-Hebei and the Yangtze river delta.
Steel production was 88.3 million tons in March, down 6 percent from the same month in 2021, while first quarter output was 243.38 million tons, a drop of 10.5 percent from the same period last year.
The first two months of the year saw steel production drop as pollution curbs were imposed before and during the Beijing Winter Olympics, while lockdowns as part of China’s zero-COVID-19 policy affected output last month.
These lockdowns are going on, including in some steel producing areas, meaning production this month and in the second quarter overall may be lower than would otherwise be the case ahead of the peak summer construction season.
But this raises the possibility of catch-up production in coming months, meaning iron ore demand would rise as steel mills increased capacity utilization in order to meet demand created by government stimulus spending.
China’s gross domestic product (GDP) was 4.8 percent in the first quarter, slightly ahead of market expectations but also below the 5.5 percent target for 2022 as a whole.
The below-par GDP growth wasn’t unexpected given the COVID restrictions, and the market expectation is that the economic accelerator will be pressed fairly hard once the current outbreak is over. — Reuters
