Chinese steel demand may recover as stimulus and economic reforms carry the market higher following a sharp deceleration in the fourth quarter, with domestic mine cuts boding well for seaborne iron ore demand, consultancy Wood Mackenzie said Wednesday.
Iron ore and steel industries in China are restructuring and closing mines in response to increasingly stringent environmental controls, supporting benchmark iron ore prices at above $70/dry mt CFR China, Wood Mac said in a report.
"Several smaller mines have already had to close in the face of rising compliance costs, and we expect more closures in the year ahead," it said.
The Platts 62% Fe IODEX assessment rose to $85.05/dmt CGR China Tuesday, up almost $10/mt since Friday after a dam burst in Brazil threatened iron ore supplies.
Wood Mac said it expected the Chinese market for iron ore will stagnate and decline over the longer term and India will pick up growth in the sector.
Chinese steel production may be peaking, with pig iron rates slowing and steel mill margins falling steeply in the fourth quarter of 2018.
The fall in margins came as steelmaking output and activities were curbed in the northeast to improve air quality, and lower steel prices persisted after correcting from a peak earlier in the year.
"Although currently only a small player in the global iron ore market, we believe the growth in Indian iron ore imports in 2018 is the start of a long-term structural change that could ultimately lead to its complete withdrawal from the seaborne export market," Wood Mac said.
China was facing a significant slowdown in industrial production growth and a decline in manufacturing, and government policymakers were doing their best to stimulate an ailing economy, Wood Mac said, while US-China trade talks continue with the risk of a sustained delay.
"The success of China's economic reform program will have a strong influence on the metals market this year," Wood Mac said.
"So far, the Chinese government has managed to prevent a hard landing for the construction sector through its stimulus program. But it is debatable how long these reforms will last. We are betting China will pull yet another rabbit out of the hat, but 2019 is already looking like an uphill struggle."
Developments in resolving the US-China trade dispute will play a pivotal role in price direction in 2019, Wood Mac said.
"An early settlement to this issue will ease concerns over a sharp contraction in global economic growth. However, continued stalemate will exacerbate already fragile sentiment."