While today’s budget will benefit from a booming iron ore price as well as a faster than expected recovery from recession, a prudent Treasury will plan for a peak in iron ore in coming months. Prices hit new record highs last Thursday and Friday, and could very well rise for some time to come, but the Chinese government is driving major policy changes that will eventually see crude steel production in China fall, meaning a fall in iron ore imports.
The policy changes are unrelated to China-Australia tensions; instead, they’re driven by the Chinese government’s desire to cut pollution from the steelmaking sector, which has defied government push to curb pollution that began in 2015.
Tax and tariff changes started at the beginning of May that will reduce export rebates and cut tariffs on imports of steel manufacturing input, while increasing export tariffs on high-quality specialty steel products. That will make it cheaper for China to import semi-finished products and even crude steel and retain the less polluting (to make) specialty steels.
The changes were explicitly intended to “reduce domestic crude steel production and reduce total energy consumption”.
The second major change, announced last week, is a shift in policy that will see capacity cut by forcing existing steelmakers using blast furnace technology to move to electric arc systems — but at significantly lower capacity. Areas where any new steel manufacturing capability is banned — whether electric arc or not — have also been expanded. The Chinese government wants to significantly curb Chinese steel production capacity.
The changes helped trigger a remarkable surge in iron ore prices this week as Chinese steel mills try to get their hands on as much ore as possible before the full suite of changes kicks in. The rises have been so dramatic that in the three trading sessions since China came out of its five-day Labour Day break, prices have jumped by up to 25%. The rises for the three main grades of ore traded — 62% Fe fines, 58% Fe fines and 65% Fe fines (from Brazil) — rose by record amounts for a single day on Monday. The former (62% Fe Fines) hit a new record of US$230.56 a tonne, up 8.6% on the day or US$18.31 a tonne.
Move to semi-finished products
The two policies seem designed to drive down consumption of iron ore and coking coal (most of which is currently imported) in local steel manufacturing and move to importing and using semi-finished steel products — even pig iron and crude steel. The aim is lower CO2 emissions by the steelmaking sector, as well as less damaging smog (especially in and around Beijing from fallout from steel plants in and around Tangshan, 180 kilometres to the south-east of the capital).
The crackdown on pollution and capacity started in April in the Tangshan area of China (which is responsible for producing 12%-14% of China’s billion tonnes of crude steel a year). More than 20 plants were ordered to close for varying periods and capacity cuts have also been imposed.
If you’re thinking shifting production offshore won’t actually change the global level of emission, you’re correct: China will limit and then cut some of its emissions from its existing highly polluting crude steel making sector while taking products from other countries — meaning the emissions are produced there, not in China. It’s deliberate “carbon leakage” — something other countries around the world, like the European Union, are desperate to prevent. But it means the emissions won’t appear in China’s column in international negotiations on climate action.
It means China’s appetite for iron ore will diminish — and significantly if the government has its way — as Chinese steel manufacturing capacity reduces. Foreign steelmakers in Japan, South Korea, Taiwan, Europe, India, the US and even Australia (theoretically) will instead be able to make semi-finished steel products and ship them to China. China has issues with Japan, South Korea and Taiwan, of course, but the desire to cut its emissions (and return blue skies to Beijing more frequently) seems to be a greater ambition.
Hopefully foreign steelmakers will buy more coking coal and iron ore from Australia and soften any fall in demand from China. Japanese steel mills have always favoured lump ore (compared to the iron ore fines China demands). Lump ore uses less energy to convert to crude steel and therefore has lower emissions.
Or some visionary might conceive of new steelmaking plants in the Pilbara to replace the exported iron ore with crude and semi-finished steel products to ship to China.
“Or some visionary might conceive of new steelmaking plants in the Pilbara to replace the exported iron ore with crude and semi-finished steel products to ship to China.” – get out of here when did this country every do anything the ‘hard’ way?
Well BHP dropped a bundle with the $2.5 billion Boodarie hot briquetted iron plant at Port Hedland, completed in 1999 and closed down some 5 years later.
From the SMH 2004
BHP Billiton is poised to bring the curtain down on one of its most ambitious projects: the $2.5 billion Boodarie hot briquetted iron plant at Port Hedland in north-western Australia.
People with knowledge of discussions occurring inside the world’s largest mining group say closure of the huge facility on safety grounds is being seriously considered even though a world-wide steel industry boom has pulled hot briquetted iron (HBI) prices up to the point where Boodarie is capable of making money for the first time in its troubled history.
Boodarie also represents BHP’s investment in “value adding” the iron ore it mines in the Pilbara, meeting the original commitment it gave the West Australian Government in return for access to iron ore leases.
But the WA Government and BHP’s unions would have difficulty claiming that the commitment has not been met if the board of BHP Billiton decides that the plant’s safety cannot be guaranteed.
China’s insatiable appetite for Pilbara iron ore has created tensions this year as both BHP Billiton and Rio Tinto push production to the limits.
Many, including union officials, nevertheless regard the HBI plant as a brave investment and one that has already survived longer than expected.
As for the the $2.5 billion construction cost of the plant itself, that is already written off, as part of the clean-up of the group in the late ’90s.
Hot briquetted iron is a concentrated iron product used as feedstock in electric arc steel making and Boodarie sold enough of it to generate $US221 million of revenue in the year to June 30, 2002, but still lost $US53 million before depreciation, amortisation, interest and tax. Since then, the steel-making boom that China is driving has pushed HBI prices up sharply, from $US160 a tonne to over $US200 a tonne.
And in the six months to December 31 last year, Boodarie generated revenue of $183 million – almost as much as it generated in all of 2002-03, and enough to nose the HBI plant into the black on an EBITDA basis, by $US4 million.
China is by no means the only country to off shore it’s carbon intensive manufacturing. Surely if their demand for steel products results in lower net emissions this can be no bad thing – especially if Australia got smart for once and invested in zero CO2 steel production, as has been urged by Garnaut.
Many, many years ago . . . I remember the ire of Australian public focussed upon one Prime Minister nick named “Pig Iron Bob.” So am somewhat puzzled . . . surely steel, and for that matter, iron ore, an essential element in producing armament?
May also be due to steel works with automation etc. not offering significant (low skilled) employment in nations, with declining working age populations anyway.
Ricardo’s theory of comparative advantage would also suggest that it shows progress in the make-up of the Chinese economy too as it matures and moving away from low value industrial to added value and complex types of production e.g. electronics, chips, EVs etc..
Yet many in Oz are led to demand more of such old industry for low skilled workers…..
Whilst we have this ship of fools running around in Canberra there will be no real intelligence from within that building.
It does seem logical for Australia to process our own steel and sell value added stuff rather than sell both iron or and coal to china and then buy back inferior steel. Trouble is there will be someone who doesnt want that for whatever reason of their own and they will bribe the govt to stop it happening. Logic means nothing if the real agenda is to line your own pockets.
Imagine if we played a bit dirty, made all our own steel here and banned the export of iron ore, so countries could either scout around for limited iron ore resources elsewhere or buy our green steel. Requires a bit of nastiness on our part, but we have never been in short supply of that.
May seem logical, but old types of industry like steel making, does not make it economical nor sensible in the short to long term, when others can compete on quality, price and hence, better value; Australia needs to focus more on sophisticated and high value added industries where it has an advantage e.g. health/medical.
Foreign produced steel isn’t necessarily inferior despite popular belief. Australians seem to think that everything produced here is superior (not by a long shot actually). That aside, simple economics means that steel production is not viable in Australia. Wages and internal costs in general are too high.
I love when people buy furniture made with Australian Wood. While the wood is from here, it’s shipped overseas and turned into furniture. Same reason as steel, too expensive to make here. “Australian Made” only requires 50% of the total costs in production to have been incurred. A bit like Swiss Watches actually.
Didn’t Joe Bjelke Petersen and Lang Hancock propose a rail line acros northern Australia, coal in Queensland, iron ore in West Australia and , voila our very own steel making indutry.There would have been steel mills on both sides of Australia as the trains would always be at full capacity with iron ore from the Pilbara going to the steel mills in North Queensland and vice versa, the empty wagons now going back to the Pilbara filled with Queensland coal for the steel mills in the Pilbara.Great idea, no demurrage on the wagons, full capacity in both directions.
It’s called the “iron boomerang”