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 The recent plunge in iron ore prices may be just the start of what could be a sustained decline for the rest of the year, as demand from the world’s biggest consumer is widely expected to further drop under an increasingly strict government campaign to cut steel output to meet environmental and other goals, Chinese industry bodies and experts warned on Monday.

Iron ore prices have already been on a declining trajectory over recent days following record highs earlier this year and further declines could have serious global implications given China’s massive imports, especially from countries such as Australia, analysts said. 

In a research note on Monday, the China International Capital Corp (CICC), one of the country’s biggest investment firms, warned that as China’s domestic steel production is set to ease, and that iron ore prices will likely drop to below $200 per ton. 

“We expect that growth speed for China’s steel production will turn negative starting in the third quarter and iron ore pries will also fall from the top,” CICC said in the note.

Lifted by robust demand both at home and abroad, China’s steel output has been rising sharply in the first half of the year. During the period, China’s crude steel output jumped 11.8 percent year-on-year, according to the National Development and Reform Commission (NDRC), the top economic planner. China’s steel exports rose 30.2 percent year-on-year during the period, the NDRC said.

However, due to environmental and other policy goals, China has moved swiftly to curb steel production. In the latest move, the State Council, China’s cabinet, has announced tariff hikes on certain steel products to cut exports, which came into effect on Sunday. 

Industry insiders also said that other measures have also been taken to curb steel production. “Cutting production is the main theme for the entire steel industry for the rest of the year not only because of environmental goals but also the unsustainability for firms to produce so much steel when the cost is so high,” a steel industry insider told the Global Times on Monday, adding that firms have been asked to “strictly follow government coordination.”  

Given the rapid growth in steel output in the first half of the year, the task to cut steel production to ensure full-year output is largely in line with the level in 2020 could be very challenging but serious reduction is widely expected, analysts said. That could be mean steel production could drop as much as 12 percent year-on-year in the second half of the year, according to some analysis.

The China Iron and Steel Association on Monday also asked steel companies to further “enhance self-discipline” and stay cautions over the risk of rising costs. The industry body also noted that the market will likely return to a “stable range’ for the rest of the year if supply and demand is kept balanced.

China’s curbs on steel productions have also already dragged down iron prices. On Friday, iron ore on the Dalian Commodity Exchange closed 8.1 percent lower at 1,027 yuan ($158.95) per ton, adding to a monthly loss of nearly 8 percent – the largest drop since February 2020, according to media reports.

If China’s steps up curbs on steel output in the rest of the year, that could have huge implications for the country’s massive iron ore imports, with the vast majority coming from Australia. 

In the first six months of the year, China imported 560.71 million tons of iron ore, up 2.6 percent year-on-year, which worth 603.2 billion yuan, according to Chinese customs data. During the period, average prices for imported iron ore reached 1,075 yuan per ton. 

Global Times