China air quality crackdown set to hurt iron ore demand – by Michael Roddan (The Australian – July 28, 2015)

The troubles for the iron ore price are set to continue, with a Beijing crackdown on air pollution in September expected to reduce demand from the region’s steel mills.

Meanwhile, Australian exports of the commodity are set to rebound from a sluggish July, positioning the price of Australia’s biggest export for a renewed plunge, after only recently bouncing from a decade-low.

The Chinese government is likely to limit steel production in Hebei province, which surrounds Beijing and major iron ore port Tianjin, in a bid to ensure higher air quality during World War II commemorations in September, Macquarie Wealth Management says in a research note.

The clear-sky days will be similar to the “APEC Blue” of last November, when the government clamped down on emissions during the 26th annual gathering of Asia Pacific leaders in Beijing.

“Steel mills near Beijing, particularly those in Hebei province, will probably be forced to shut down production again,” Macquarie said in a research note. “This clearly spells trouble for iron ore prices.”

China accounts for around half of global steel production, while Hebei itself makes up over 20 per cent of China’s production. The APEC meeting led to a 6 per cent year-on-year contraction in steel production in Hebei last November, compared with a slip of 2.5 per cent for mills outside the province.

The investment bank said the supply and demand balance of the iron ore market was complicated by the “extremely low” inventory of ore held by steel mills.

During the APEC meeting there was an “immediate impact on market sentiment”, Macquarie said. The price for steel shot up, while prices for iron ore didn’t perform as well — as weaker steel production meant less consumption of iron ore — and cash margins at steel mills improved.

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