Virus-related shutdowns have negatively impacted steel demand and future uncertainty is depressing ore prices, for now.

Iron ore spot prices for delivery in China have fallen dramatically over the last year. In July 2021, the price stood at $224 per ton; by mid-July 2022, the price was wavering around the $110 mark. In the interim, it’s been a rocky ride, with the commodity achieving a 2022 high in March of around $160 per ton before going on a roller coaster ride in June. It started off at $145 per ton and tried to close in on $150, before plummeting to levels not seen in seven months. 

Price volatility signals the perception of uncertainty on the part of traders. It’s impossible to assign a single cause for these price swings, but China’s economy, particularly its zero-COVID policy and its implications, is playing a large role.

Of course, developments in China are not alone responsible for iron-ore price chaos—the war in Ukraine, for one, has been disrupting metals markets globally. Ferrexpo, a Swiss-based trading and mining company and the third-largest exporter of iron-ore pellets, declared force majeure on some contracts earlier this year thanks to Ukraine’s snarled logistics networks. But those developments would have tended to constrain supply and push prices up. And yet, the opposite situation currently prevails.

China buys over one-billion tons per year of iron ore—70% of the total global seaborne trade—and produces over one-billion metric tons of crude steel per year—53% of the world’s total. That’s why demand for iron ore in China will inevitably loom large on the global landscape.

The zero-COVID policy distinguishes China from much of the rest of the world, where economies have largely been opened up, even on the face of new virus variants and outbreaks. Not so in China, where the government recently shut Shanghai down for over two months. Some manufacturing facilities in Shanghai were shuttered for ten weeks or more, and China’s domestic demand for steel, and for the iron ore that goes into producing it, have suffered as a result. It’s also been reported that some manufacturing workers and truck drivers have been slow to return to work, hampering the effort to open the Chinese economy. 

China Steel Production Down 

In February, He Wenbo, chairman of the China Iron and Steel Association (CISA), opined that steel demand in China would remain stable during 2022. But his review of the industry after the end of the first quarter of this year, reported on the CISA website, indicated that domestic steel production in China decreased by 10.5% year over year, and that “downstream steel consumption is still recovering.” 

A recent report from S&P Global showed that “some Chinese steel mills, especially the private ones, have started to voluntarily cut steel output as weak steel demand dragged their margins into negative territory.” And, as a recent report from the International Monetary Fund put it, “A sharper-than-expected slowdown in China’s growth would negatively impact the iron ore price.” 

In short,…

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