IRON ORE
Snapping the Elastic
November 2017
Chinese domestic concentrate production reached a peak in 2011 at 360Mt and maintained this level before significantly declining from 2013. Production rebounded in 2017 on rising prices and is forecast to increase 10% yoy to 220Mt. Chinese production is famously price elastic due to low barriers to entry and lax regulation but the government’s economy wide crack down on pollution and emphasis on quality over quantity is likely to snap the elastic and put a firm lid on domestic capacity.

Chinese ROM Production 

The estimated average ROM grade has been falling since 2010. In 2010 the average ROM grade was estimated at 28% but this has fallen to be stable at approximately 17% over the last 3 years. With the falling grade ROM production continued to grow until 2014 but this was insufficient to offset the declining grade and concentrate output declined. For the first time since 2013 ROM production increased in 2017 on rising prices. September 2017 cumulative ROM production is up 4% year on year at 971Mt and is forecast to reach 1,337Mt by the end of the year, but is weakening with prices, having been up 7% in the first half of the year. 

Chinese ROM production typically shows strong seasonality, staring to decline in November with a significant low in January and February. The seasonality is a result of national holiday periods, winter limiting production and reduced demand from steel mills.  

 

 

 

Iron ore imports 

Chinese imports of iron ore continue to rise and will potentially top 1,000Mdmt by the end of 2017.  As domestic supply has declined, demand has increased and imports have filled the void. In 2010 domestic supply represented 37% of total supply but by 2107 domestic supply provided only 18% of China’s iron ore requirements. The trend is expected to continue with domestic supply representing 16% of total supply in China over the next two years. 

 

 

 

Iron ore enterprises in China

The Chinese government reportedly it aims to close 1000 iron ore operations in a bid to improve air quality and reduce pollution. The target of these closures is likely to be small operations with poor operating safety and environmental practices. According to Chinese government statistics approximately 1,000 iron ore mines and processing facilities have closed between 2013 and 2015. China reports that in 2015 there were 2,600 iron mines and processing facilities. Of these mines 13% are considered medium-large with ROM production above 0.6Mtpa.

 

 

 

The total number of operations declinded by 40 over five-years from a peak 4,262 in 2010. Large and medium projects have been substantially more robust. They continued to grow in number till 2013 and have only started to decline in the last 2 years. Also, the percentage of larger enterprises has continued to grow over the last 5 years from and now represent 8% to 13%. Data for 2016 and 2017 has not yet been published but AME expects there to have been a further decline to 2,350 operations in 2017 with medium-large firms representing 14%. Large and medium enterprises are estimated based on revenue to produce 50% of the iron ore in China. Additionally, in 2016, 85Mt (42%) of concentrate production came from mines operated by steel producers. Thus, the closure of 1,000 operations will have only a minor impact and the majority of the domestic supply market will continue to be controlled by the integrated steel producers.  

 

Provincial Supply Trends 

Hebei province is the major supply region in China, and since 2010 it has supplied approximately 40% of the country’s domestic iron ore. This is followed by Sichuan which has increased its share from 9% in 2010 to 16% in 2017. In terms of ROM supply dynamics on a provincial level Hebei has remained fairly stable after around 30% growth from 2010-2014 its ROM production is forecast to have continued to grow by 2% from 2014-2017. The largest provincial swing production appears to come from Liaoning which has seen provincial ROM production decline by 70Mt (36%) since 2014. 

 

 

 

Conclusions 

AME forecasts the following to occur within Chinese domestic iron ore supply. 

The government is likely to force the closure of smaller mines. Most at risk will be those with low grades and poor financial, safety and environmental performance. A decline of domestic iron ore concentrate supply is expected which will result in the continued rise of imported iron ore. We expect to see rationalisation of mines and companies to form more efficient operations with projects merging to form combined operational hubs.  

The forecast decline in domestic production provides an opportunity for exporters of magnetite concentrate and pellet to China. The Belt and Road infrastructure initiative could open cost effective transport routes from the Russia and the Commonwealth independent states region to bring concentrates into China but the completion of these major infrastructure projects is not expected in the short term. With current high premiums for high iron, low silica, and low alumina products continuing, interest in magnetite projects and their exothermic reaction is starting to heat up.