The Impact of China's Policy on the Iron Ore and Steel Market

China is preparing for winter. Last week, the Chinese government announced another round of heating season capacity cuts for its heavy industry, designed to cut emissions and improve air quality in the northern provinces. Steel raw materials such as iron ore and coke have been mobilized since the end of last week

In large cities, the share of steel production needs to be reduced by 50 percent, as in the previous year, but the regional coverage has been expanded.

The impact on steel production and iron ore consumption could be much greater than last year, especially if the regulations are tighter. In fact, steel production in China rose during capacity cuts last year, as factories in unaffected cities and provinces increased capacity utilization to offset the cuts in affected cities.

Steel raw materials such as iron ore and coke gathered on the news, rising from 3 percent to 6 percent since the end of last week, likely reflecting pre-sales expectations for steel ahead of a shortened heating season. However, steel prices also rose by about 3 percent, which was an incentive for taller steel mills to start or expand production.

While capacity controls are diminishing the prospects for the iron ore and steel market, we are confident that the Chinese government will maintain an adequate supply of steel to key infrastructure, manufacturing and the real estate sector. The government will not deliberately slow down the slowdown in these sectors.

Over the medium to long term, there will be a weakening in demand for iron ore and steel in China, leaving markets well-secured and limiting price increases.