China emissions directive chokes iron ore prices
Iron ore prices have taken a dive over the last month as the largest buyer of the commodity, China, pulls back.
The big picture: Iron ore is a key input in crude steel production. A Beijing directive earlier this year called for lower production in order to curb carbon emissions. The Chinese government also raised export taxes to make it less attractive for steel mills to sell abroad.
Why it matters: The global response to climate change has the power to create and reshape industries, impacting the supply and demand for all kinds of materials.
- China is aiming to shift some of its steel production away from the blast furnaces that require coal and iron ore — to electric furnaces, which use electricity to melt scrap steel into new products, says Michael Widmer, commodity strategist at BofA.
State of play: The steel sector produces as much as 20% of China's carbon emissions, CNBC.com reports.
By the numbers: China's steel production declined 5.6% month over month in the first half of July, Bloomberg reported.
- Iron ore prices have fallen 21% since July 20, to $167 per ton, according to S&P Capital IQ.
Of note: Those figures may be down, but they’re down from historically high levels. Iron ore prices hovered between $80 and $120 per ton throughout much of 2019 and 2020.
- And in the first half of 2021, China’s steel production was up 12% compared to 2020, per CNBC.
Meanwhile, when it comes to the supply of iron ore, global producers like Vale are boosting capacity — and that’s also pressuring prices.
- The largest iron ore suppliers have production costs of around $30 per ton — so current prices in the $160 area are still lucrative, Widmer says.
The bottom line: As the largest buyer of iron ore, what China does will determine the market. If the government sticks to its guns on shifting away from blast furnaces, the market for iron ore could gradually become a smaller one in the years ahead, Widmer adds.