Recently, the three major international iron ore giants BHP, Rio Tinto, and Vale released their second-quarter production reports, all showing output below expectations.

Specifically, in the second quarter of this year, BHP's iron ore production was 72.8 million tons, a year-on-year decrease of 4.2% and a quarter-on-quarter increase of 9%; Rio Tinto's iron ore production was 75.9 million tons, a year-on-year decrease of 9%, with shipments at 76.3 million tons, down 12% year-on-year, and inventory also decreased; Vale's iron ore production was 75.7 million tons, an 11.3% quarter-on-quarter increase and a 12% year-on-year increase, but still below the analyst expectation of 78 million tons.

In addition to the disappointing iron ore production, the supply side of iron ore will also face multiple challenges in the coming months.

BHP stated that it will carry out "major maintenance" activities at Port Hedland in the next three months. Port Hedland is BHP's main iron ore loading facility in Western Australia.

Port Hedland

Regarding the decline in iron ore production in the second quarter, Rio Tinto attributed it mainly to higher-than-average rainfall days in the western Pilbara, the initiation of new alternative capacity projects leading to some mine shutdowns, processing plant availability, and community cultural heritage management, and stated that the delivery of alternative mines in Australia will be delayed, resulting in iron ore shipments being at the lower end of its guidance range of 325 million to 340 million tons.

At the same time, Vale also announced that the restart of several operations has been delayed. Anglo American has lowered its iron ore sales guidance due to railway restrictions and adverse impacts in South Africa.

This has been followed by a series of bullish voices regarding iron ore prices.

Nicholas Snowdon, head of base metals and commodities research at Goldman Sachs, stated in an interview that the iron ore bull market will not end anytime soon. Snowdon pointed out that although there are signs of a slowdown in steel demand in China, steel demand in other parts of the world and developed markets remains exceptionally strong. The market currently appears very tight, and the demand growth rate remains strong.

Wall Street analysts say that in the coming months, iron ore supply will still be difficult to increase significantly, as the world's largest iron ore producers still need to work hard to address a series of issues from project delays to adverse weather. There is still room for iron ore prices to rise, potentially reaching $300 per ton.

However, the reality is quite the opposite.

This Friday, the most active iron ore contract on the Dalian Commodity Exchange fell about 10% from last week, marking the largest weekly decline since February 2020, and is currently down 17% from the record high reached in May.

CFR China Northern 62% iron ore price index trend since the beginning of this year

The most traded iron ore contract on the Singapore Exchange in August fell 0.2% to $197.25 per ton.

According to Fastmarkets MB data, the benchmark 62% iron ore powder imported from Northern China traded at $201.33 per ton on Friday, down 0.5% from Thursday's closing price.

Data from SteelHome shows that the spot price of benchmark 62% iron ore in China hit a six-week low of $209.50 per ton on Thursday.

The reason for the plunge in iron ore pricesiswhat?

The main reason for the decline in iron ore prices is market concerns about the domestic push to reduce steel production, prompting steel mills to begin cutting output.

The latest data released by the National Bureau of Statistics shows that from January to June 2021, the cumulative crude steel production nationwide was 563.3 million tons, a year-on-year increase of 12.9%, but in June, the national crude steel production was 93.8752 million tons, a year-on-year decrease of 5.6%.

Liang Haikuan, an iron ore researcher at Founder Futures, believes that the main reason for this round of decline is the renewed fermentation of expectations for steel mill production restrictions, as major steel-producing provinces have emphasized the need to achieve the goal of not increasing crude steel production this year, leading to renewed pessimism in the market regarding raw material supply.

Data source: National Bureau of Statistics, My Steel Network

On June 29, Anhui Province was the first to hold a symposium on crude steel production reduction, and on July 1, Gansu Province followed suit by setting a target for crude steel production reduction this year. In the following three weeks, provinces such as Jiangxi and Hubei also successively issued crude steel reduction tasks. Recently, steel companies in Jiangsu Province have received clear targets for this year's production not to exceed last year's levels, while Shandong Province issued a notice clearly requiring crude steel capacity to be reduced to no more than 76.5 million tons for the year, taking into account factors such as environmental protection, energy consumption, capacity utilization, and layout planning to determine production control targets for each steel enterprise. Tangshan City will also implement a 30% production limit for the entire second half of the year, and it is expected that the output of Hebei Province, the largest crude steel producing province, will also shrink.

With multiple steel-producing provinces strictly controlling crude steel production in the second half of the year, what will happen to iron ore prices in the future?

Wind data shows that as of July 23, the total iron ore inventory at 45 ports nationwide was 128 million tons, with total inventory increasing for five consecutive weeks.

The research team at Shanghai Nonferrous Metals Network stated that many steel mills have been carrying out maintenance on their blast furnaces recently, leading to a slowdown in raw material procurement, and port inventories are expected to continue to accumulate. As domestic steel companies gradually expand the scope of production cuts, there is potential for a contraction in future iron ore demand, coupled with some steel companies increasing the use of low-grade ores, indicating that iron ore prices may still have downward potential.

The iron ore market indeed needs to cool down!

Source: Mining Industry