Australian iron ore exports to China surged in the first half of the year, as demand from steel mills rose to supply Beijing’s infrastructure building push to boost the coronavirus-hit economy.
Iron ore exports from Australia to the rest of the world, though, remained weak, reflecting the sharp differences in the pace of the recovery in major economies from the damage done by the coronavirus pandemic.
Australian mining giant Rio Tinto reported a 3 per cent increase in total iron ore shipments in the first half of the year, including a rise in a new trend of port-side sales in China, amid the need for more flexible trading in the early days of China’s economic recovery.
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But while Chinese demand for iron ore has improved progressively since it reopened its economy in May, Rio Tinto cautioned in its first half report that recovery in demand around the world, such as in Japan and Europe, has “yet to begin meaningfully and is likely to be subdued when it does”.
There’s efficiency gains and less regulation. It’s a clear sign of China’s industrial production coming back
Alongside steady sales of seaborne iron ore to support longer-term contracts, Rio Tinto, the second-largest diversified miner in the world, gained 61 new customers for port-side trading. This new sales venture started in September last year, and allows buyers to acquire iron ore in smaller volumes with shorter lead times and smaller credit lines than seaborne trading, allowing steel producers to keep their inventories to a minimum but still restock on a just-in-time basis if demand rises.
The increasing attractiveness of port-side trading underlines a need for more flexibility in the early days of recovery, when there is still volatility in Chinese demand as the Covid-19 pandemic continues, said Tim Harcourt, former chief economist at the Australian Trade Commission.
“There’s efficiency gains and less regulation. It’s a clear sign of China’s industrial production coming back,” he said, adding that flexible port-side trading is helping steel producers reduce variable costs to make production viable in the short-term.
Rio Tinto’s strong iron ore sales in the first half of the year were tied to a 9.6 per cent increase in total Chinese imports compared to a year earlier, according to data from China’s General Administration of Customs.
Chinese gross domestic product also expanded by a stronger-than-expected 3.2 per cent in the second quarter from a year earlier, a sharp reversal from a first quarter contraction of 6.8 per cent.
Iron ore prices have also performed well on the back of rising Chinese demand, soaring to nearly US$110 per tonne in July, a level not seen since August 2019.
This was driven not only by a rise in demand from China, but also a fall in the supply of iron ore from mines in Brazil, where the number of coronavirus infections has soared and is now the second-highest in the world, after only the United States, economic research firm Trading Economics said.
But the downside risk in rising iron ore prices is that profit margins for steel production will be squeezed, which may lead to a slowdown in production that could trigger a future decline in Chinese demand, ANZ Research said in a new report on Monday.
Rising inventories at Chinese steel producers also signal a potential slowdown in demand for Australian iron ore.
“Inventories are a good gauge for underlying demand strength. Iron ore inventories have started building up, signalling waning demand strength,” according to the report by ANZ’s Daniel Hynes and Soni Kumari.
And with a likely decline in Chinese iron ore demand on the horizon, and a slow pickup in steel production among major customers outside China, the industry is not yet on a firm upwards trajectory, both Rio Tinto and analysts cautioned.
Chinese demand for iron ore has thus far proven to be relatively robust, despite the impact of Covid-19 and the shutdown of significant sectors of the Chinese manufacturing industry,
But some are optimistic. Australia’s department of industry expects the long-term performance of its iron ore exports to be positive, with China’s demand set to remain strong in the future given a need for it to rely on its domestic economy to produce growth in 2020. That means prices will stay relatively high, according to the department’s “Resources and Energy Quarterly” report released last month.
“Chinese demand for iron ore has thus far proven to be relatively robust, despite the impact of Covid-19 and the shutdown of significant sectors of the Chinese manufacturing industry,” the report said.
“At this stage, it is not expected that Chinese demand will fall significantly, though the ongoing decline of consumer spending in [Organisation for Economic Cooperation and Development] nations will increase the dependence of the Chinese steel industry on domestic stimulus measures.”
A significant global recovery in 2021 would offset any reduction in iron ore demand in China, it said.
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