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Iron ore prices slump as China places limits on steel production

Iron ore, the main ingredient in steel production, continued its free fall yesterday as China applied the brakes to steel production as part of reducing carbon emissions. Photo: REUTERS/Fayen Wong

Iron ore, the main ingredient in steel production, continued its free fall yesterday as China applied the brakes to steel production as part of reducing carbon emissions. Photo: REUTERS/Fayen Wong

Published Aug 11, 2021

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IRON ORE, the main ingredient in steel production, continued its free fall yesterday as China applied the brakes to steel production as part of reducing carbon emissions.

Prices for iron ore cargoes with a 63.5 percent iron content decreased by 3.75 percent to $167 (about R2 474) a ton, the lowest level since early April on weak seasonal demand and as some Chinese steel producers were told to cut output.

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Commenting on the slump in iron ore prices, Kumba Iron Ore’s executive head of marketing, Timo Smit, said the seasonal slowdown, combined with further steel production cuts in China, had put pressure on prices.

“The authorities have signalled their intent to limit 2021 production at 2020 levels. This would imply a significant reduction in the second-half steel production, given the strong growth seen in the first half of the year,” said Smit.

China, which is responsible for a quarter of the world’s greenhouse gas emissions, told steel producers in several provinces to limit their production to 2020 volumes in a push to curb carbon emissions. In addition, China raised export tariffs on some steel materials and removed rebates on cold-rolled products.

Iron ore prices have rallied since the last quarter of 2020 in tune with the rally in commodity prices as major economies revved up with monetary measures to strengthen demand.

Prices surged to record highs, breaking the $200 a ton mark in June at $214.42 a dry metric ton compared with $103.30 a year earlier amid the global demand for metals.

Anchor Capital’s investment analyst, Seleho Tsatsi, was of the opinion that the iron ore price of more than $200 a ton was unsustainable.

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“We expect that prices will come down over time,” Tsatsi said.

The high iron ore price has been a tailwind for mining companies, including Kumba, which generated revenue of R63.6bn during the six months to the end of June, an increase of 101 percent compared to R31.6bn a year earlier, partially offset by a stronger rand dollar exchange rate.

The group also recorded earnings before interest, taxation, depreciation and amortisation of R44.4bn at the end of June.

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With iron ore prices reaching highs, global mining giant BHP produced a record 252 million tons in Western Australian iron ore in the 2021 financial year.

Glencore said in its 2021 half-year report that global crude steel and pig iron production had each shown double-digit growth year-on-year, driven by the recovery in the global economy. At the same time, there was only a marginal increase in seaborne iron ore supply.

“Healthy steel margins supported higher iron ore prices and premiums for high-grade sinter fines, lump and pellets,” said Glencore.

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