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Latest Victim of China's Pollution Problem: Iron Ore

Post Date: 27 Aug 2015    Viewed: 587

A parade planned in China to mark the 70th anniversary of the end of World War II is the latest threat hanging over the depressed global iron-ore market.

Beijing has invited many world leaders to attend the event scheduled for Sept. 3, and its efforts to put on a good show include cleaning up pollution. The capital is frequently blotted by smog from heavy polluters in nearby provinces such as Hebei, which produces nearly a quarter of China’s steel.

Last year, China’s push for clear skies at a global summit in the city led to factories and steel mills being temporarily closed. Now, the iron-ore sector is grappling with a sense of d�j� vu as Chinese authorities order steelmakers and other heavy industry to switch off. China is the world’s No. 1 steelmaker and buys nearly two-thirds of all iron ore traded internationally.

The shutdown last November, ahead of the Asia Pacific Economic Cooperation forum nicknamed ‘APEC Blue’, resulted in a more-than 6% slide in China’s monthly crude-steel output. The price of iron ore tumbled more than 5% in the two weeks leading up to that summit.

Iron ore has already recorded a 40% decline in prices over the past year and recently sank to a decade low amid record output from Australia’s major miners including Rio TintoPLC and BHP Billiton Ltd.

The official Xinhua News Agency said Chinese authorities aim to reduce air pollution in and around Beijing by as much as 40% for the parade. It said the temporary controls, to last from Aug. 28 to Sept. 4, would result in more than 10,000 factories reducing or stopping production and work on nearly 9,000 construction sites stalling.

Beijing is also placing restrictions on road traffic, clamping down on drones and sprucing up the city with millions of flower pots.

“Compared to ‘APEC Blue’ in November 2014, the area affected by ‘Parade Blue’ is even bigger, suggesting that the impact on production could be deeper, especially among heavy industry,” said Jianguang Shen, economist at Mizuho Securities. The suspension order for factories and steel mills covers a total of seven provinces.

China’s steel production has already cooled in recent months as the government tries to stamp out overcapacity and domestic appetite for the material used to build everything from cars to skyscrapers eases. Steelmaking capacity is meanwhile being shifted away from Hebei—where the government has ordered provincial officials to cut production capacity by almost a quarter by 2020—to coastal towns.

Many analysts reckon expectations of shutdowns prompted a temporary surge in China’s imports of ore in July, and helped keep iron-ore prices stronger than they may otherwise have been recently. China’s imports of iron ore were 15% higher last month compared with June.

The temporary closures could help swell stockpiles of the raw material at China’s ports to roughly 96 million tons by the end of September from about 82 million tons at July-end, Australia and New Zealand Banking Group analysts said in a note. They said iron-ore prices could head back below $50 a ton as a result.

Iron ore fell as low as $44.10 a ton last month, its lowest level in a decade. Iron ore prices—which hit a record of $191.90 a ton in 2011—have stabilized in the mid-$50s in recent weeks and closed at $53.10 a ton on Wednesday.

Some forecasters think improvements in China’s construction market—the biggest consumer of its steel—will aid iron-ore demand later this year, while others expect supply to outstrip demand and send prices to a fresh nadir. Citigroup analysts expect prices to fall into the $30s before the end of the year.

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