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Chinese group warns that possible steel output cuts may depress iron ore prices

Singapore — Iron ore prices will be under pressure if Chinese steel mills opt for steel output cuts when experiencing greater losses in the coming months, the China Iron & Steel Association warned in its May monthly iron ore market analysis report released Wednesday.

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"Iron ore prices may still be able to narrowly range at $60/dmt CFR China throughout June, however, steel mills may be prompted to cut steel production and conduct maintenance if they are facing greater losses in the coming months," the association said.

CISA, therefore, reminded China's iron ore market participants including traders and mills' procurement officials to closely monitor demand and supply changes in the iron ore market and adjust their stocks accordingly.

In May, iron ore prices stayed firm as arrivals at Chinese ports dropped compared with a year ago due to shipment delays with the heavy rain especially in Australia in April as well as decrease in supplies as some higher-production cost miners halted or cut iron ore output in April when prices hit years' low, CISA said.

Demand from Chinese steel mills, on the other hand, had been strong, with high operational rates of iron-making blast furnaces at their plants.

Procurement officials from Chinese mills agreed on the possibility of steel output cuts in July-August, a low seasonal demand period for steel products with heavy rains in east and south China and high temperature in north China.

"Steel prices have been declining while iron ore prices have been firmly holding above $60/dmt CFR China in June, but sales has not been so bad, so mills still try to produce as much as they can as this will help to keep per tonne production cost low," an official from a mill in north China's Hebei province said.

When steel sales declines as well, piling up steel inventories, softening steel prices while steady iron ore prices will only lead to higher losses, thus making little sense for steel mills to hold on to high production levels, he added.

So far, steel production cuts have not been a concern in China, as the latest output figures from CISA showed that daily output of its 88 steel mills was 1.8032 million mt/day, up 2.08% from May 21-31, but mills' steel stocks rose as well by 3% from end-May to 16.31 million mt as of June 10.

Last month, Chinese importers applied for Australian iron ore permits totaling 61.88 million mt, down 4.84% month on month, but 29 million mt of iron ore completed Customs clearance, up 31.8% from April, according to the report.

For Brazil, Chinese participants were granted permits to import 23.67 million mt of iron ore in May, up 35.5% on month, and iron ore cleared at the Customs totaled 8.32 million mt in May, up 73% on month.

For iron ore imports under long-term contracts in May, the volume from Australia totaled 80.22 million mt, up 10.6% month on month, with the 60-63% Fe content iron ore remaining the most popular grades.

The volume from Brazil under long-term supplies reached 18.7 million mt in May, largely unchanged with a mere 1.9% increase from April, with the 60-63% Fe content iron ore also being the most preferred cargoes.

--Hongmei Li,
--Edited by James Leech,