Iron ore: China’s steel mills are preparing for easing of production cuts

Rumour that China’s steel mills are preparing for an easing of production cuts as soon as next month sent iron ore prices surging as traders positioned for an approaching inflection point in the country’s steel output.

The price of iron ore traded in the spot market jumped 6.8 per cent to $US103.27 a tonne, according to Fastmarkets MB, more than recouping the loses from Friday’s omicron-induced sell off. The iron ore price is getting extra support after Vale SA cut its production guidance for 2021 and 2022.

The biggest miners have an extra reason to cheer. Their large Brazilian rival lowered its production target to 315 million to 320 million tonnes this year. That compares to its previous goal of 315 million tonnes to 335 million tonnes.

Vale also downgraded its 2022 production estimates to between 320 million and 335 million tonnes. Vale is prioritising value over volume to protect margins. This is why it’s holding back shipments of lower-quality ore.

The Rio de Janeiro-based miner is flushed with cash even as the price of iron ore and other key commodities has tumbled. Vale is the world’s second-largest iron ore producer after Rio Tinto.

The upside to the downgrades is that the supply cuts will help support the tentative iron ore price recovery.

The steel-making ingredient has plunged deep into a bear market after hitting an all-time high above US$200 a tonne. It’s currently trading around half that. China’s orders to rein in steel production in that country triggered the sell-off. Power shortages exacerbated the drop in demand for iron ore by steel mills.

Nevertheless, the iron ore price recently appeared to have bottomed around US$90 a tonne. The trillion-dollar infrastructure plan by the US and talk of Chinese economic stimulus to support the Asian giant are giving hope that commodity demand won’t be as weak as the bears are expecting.

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