China's Strong Iron Ore Imports Contrast with Weak Steel Output

A laborer marks steel bars at a steel and iron factory in Changzhi, north China's Shanxi province January 11, 2007. REUTERS/Stringer/Files Purchase Licensing Rights
A laborer marks steel bars at a steel and iron factory in Changzhi, north China's Shanxi province January 11, 2007. REUTERS/Stringer/Files Purchase Licensing Rights
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China's Strong Iron Ore Imports Contrast with Weak Steel Output

A laborer marks steel bars at a steel and iron factory in Changzhi, north China's Shanxi province January 11, 2007. REUTERS/Stringer/Files Purchase Licensing Rights
A laborer marks steel bars at a steel and iron factory in Changzhi, north China's Shanxi province January 11, 2007. REUTERS/Stringer/Files Purchase Licensing Rights

The strength in China's iron ore imports this year stands in stark contrast to the weakness in steel production and demand, setting up a dilemma as to how the contradiction will be resolved.

China, which buys about 75% of global seaborne iron ore, imported 102.3 million metric tons in May, according to customs data, marking a third straight month of arrivals of more than 100 million tons.

For the first five months of the year, imports of the key steel raw material were 513.75 million tons, a gain of 7%.

However, China's crude steel output fell in April to 85.94 million tons, down 2.6% from March and 7.2% from the same month in 2023, according to official data, Reuters reported.

In the first four months of 2024, China produced 343.67 million tons of crude steel, down 3% year-on-year.

While official numbers for May are yet to be released, data from the China Iron and Steel Association, which represents the country's biggest mills, suggest steel output is unlikely to have staged much of a recovery last month.

Steel mills are also suffering from weak margins, with data from price reporting agency Argus showing that in the last 10 days of May, profits for producing hot-rolled coil dropped by 20 yuan ($2.76) a ton to between 50 and 100 yuan.

Sentiment among steelmakers has yet to be lifted by Beijing's ongoing efforts to boost the key housing construction industry.

Steel demand and industry sentiment may rise in the second half as stimulus measures start to have an impact, but for now the reality of soft demand for steel is outweighing hopes for a recovery.

This begs the question as to how long iron ore imports can remain at robust levels.

The rising imports haven't been used to make more steel -rather they have been used to rebuild inventories.

Port stockpiles monitored by consultants SteelHome rose to 147.3 million tons in the week to June 7, the highest in 25 months.

They have been climbing steadily since reaching a seven-year low of 104.9 million tons in the last week of October, and are now 42.4 million tons higher.

According to Reuters, the rise in inventories over the last seven months works out to an average gain of 6.06 million tons a month, which goes some way to explaining the recent strength in iron ore imports.

There is still some scope for stockpiles to rise further before they reach the record high of 160.6 million tons from May 2018.

China iron ore imports vs SGX price

There is also a solid correlation between iron ore prices and China's imports, and part of the strong import story can be ascribed to the decline in prices between the start of the year and the low so far this year in April.

Iron ore contracts traded on the Singapore Exchange hit an 18-month high of $143.60 a ton on Jan. 3 before falling to $98.36 on April 4.

This means that the bulk of the iron ore delivered up until the end of May was bought while prices were dropping.

However, since the April low prices have recovered, reaching a high of $119.64 a ton on May 6. Since then the weaker sentiment in the steel sector has weighed on iron ore, with the contract ending at $107.06 on Monday.

In the absence of rising steel demand in China, steel mills are known to suffer weak margins if iron ore prices are above $100 a ton.

This implies that the most likely way for the current divergence between iron ore imports and weak steel output to be resolved is through lower iron ore prices and import volumes.

Of course, any signs that steel demand is actually strengthening will change the market dynamics, but so far these signs are missing in action.



UK Borrowing Overshoot Underscores Task for New Government

Larry the Cat sits on Downing Street in London, Britain July 19, 2024. REUTERS/Toby Melville
Larry the Cat sits on Downing Street in London, Britain July 19, 2024. REUTERS/Toby Melville
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UK Borrowing Overshoot Underscores Task for New Government

Larry the Cat sits on Downing Street in London, Britain July 19, 2024. REUTERS/Toby Melville
Larry the Cat sits on Downing Street in London, Britain July 19, 2024. REUTERS/Toby Melville

Britain's government borrowed a lot more than forecast in June, according to official data published on Friday that highlighted the big budget challenges facing the new government of Prime Minister Keir Starmer.
Public sector net borrowing, excluding state-controlled banks, was a larger-than-expected 14.5 billion pounds ($18.75 billion) last month. A Reuters poll of economists had pointed to an increase of 11.5 billion pounds.
Dennis Tatarkov, Senior Economist at KPMG UK, said the data showed "the daunting task" for the new government to fund its agenda without worsening the public finances.
"A combination of high levels of spending and weak growth prospects will present uncomfortable choices – deciding between even more borrowing or substantially raising taxes if spending levels are to be maintained," he said.
New finance minister Rachel Reeves is likely to announce her first budget after parliament's summer recess. She and Starmer have ruled out increases in the rates of income tax, corporation tax and value-added tax, leaving her little room for maneuver to improve public services and boost investment.
Reeves has ordered an immediate review of the new government's "spending inheritance", a move that lawmakers from the opposition Conservative Party say could presage increases in taxes on capital gains or inheritances.
"Today's figures are a clear reminder that this government has inherited the worst economic circumstances since the Second World War, but we’re wasting no time to fix it," Darren Jones, a deputy Treasury minister, said after the data was published.
Starmer's government says it will speed up Britain's slow-moving economy - and generate more tax revenues - via a combination of pro-growth reforms and a return to political stability that will attract investment.
The borrowing figure for June was 2.9 billion pounds higher than expected by Britain's budget watchdog whose forecasts underpin government tax and spending plans.
In the first three months of the financial year which began in April, borrowing was 3.2 billion pounds higher than projected by the Office for Budget Responsibility at 49.8 billion pounds.
The Office for National Statistics said June's borrowing was the lowest for the month since 2019, helped by a big drop in spending on interest paid on bonds linked to inflation which has slowed sharply.
But the deficit was made bigger by a 1.2 billion-pound fall in social security contributions compared with June 2023. They were cut by former Prime Minister Rishi Sunak before the July 4 election that swept Starmer's Labour Party to power.