China policy bites as Australia’s iron ore price drops 9 per cent

Australia’s biggest export could face even steeper falls in price as China’s threats to cut down on its reliance on iron ore start to bite.

Australia’s export cash cow, iron ore, has experienced a brutal drop in price as China’s policies start to bite.

It suffered a 9 per cent slump to $US132 ($A177) a tonne, the second biggest decline on record, apart from a 15 per cent fall on August 19.

But since the beginning of July, there have been six days where iron ore has fallen by more than 5 per cent, according to data from analytics firm Platts.

Commonwealth Bank’s mining and energy economist Vivek Dhar said iron ore prices fell sharply again on Monday as steel output cuts in China weigh heavily on future demand for iron ore.

“There were reports that mills in the province of Jiangsu, which accounts for 11 per cent of China’s crude steel output, were ordered to reduce output and that nationwide steel production cuts during the winter period from mid-November to mid-March would be more severe,” he told news.com.au.

Iron Ore: The ~9% decline yesterday is second only to the ~15% fall on August 19. Iron ore prices are now tracking just above $US130/t. If we were in a cockpit, we'd be getting terrain warnings. #auspol#ausbiz

— James Glynn (@JamesGlynnWSJ) September 6, 2021

He added that there were reports more steel mills are being directly ordered to reduce output and that gave credibility to China’s plan to cap its steel output in 2021 at 2020 levels.

“China’s crude steel output needs to fall 12.2 per cent a year from August to December for China’s crude steel output to remain unchanged from 2020 to 2021,” he noted.

Another issue that could have severe consequences on the iron ore price in the long term is China’s construction industry.

One of the biggest Chinese property developers China Evergrande is on the brink of collapse as it buckles under a mountain of debt and risks defaulting on billions of dollars of loans.

The issues around China Evergrande reflects developments in the country’s property sector, which is facing headwinds from policy enacted over the last year, explained Mr Dhar.

China’s plans to cap its steel output in 2021 at 2020 levels, could impact demand for Australia iron ore. Picture: Getty Images

Against early signs of an overheating property market, the People’s Bank of China (PBoC) and other regulators announced a string of measures to rein in financial risks to the property sector in the second half of last year, he said.

“First, regulators implemented the ‘three red lines’ policy with 12 major property developers in September 2020. This policy aims to limit property developers’ debt expansion,” Mr Dhar said.

The PBoC and the Chinese Banking & Insurance Regulatory Commission also implemented a cap to banks’ outstanding property loans and housing mortgages to certain proportions of banks’ total loans at the start of the year, he added.

“However, it is worth noting that this measure will only be applied to new bank loans,” Mr Dhar said.

“While the property sector accounts for 25-30 per cent of China’s crude steel demand, it’s unlikely the issues around China Evergrande is having a meaningful impact on iron ore prices. The dominant driver of lower iron ore prices right now is China’s steel output cuts.”

NT Bullion, the owners of the rebirthed Frances Creek Mine near Pine Creek, is exporting iron ore. Picture: Che Chorley

While Mr Dhar said they were still forecasting iron ore prices to average $US170 ($A228) a tonne for the rest of the year, it was facing “risks” and the predictions for next year were grim.

“We have iron ore prices falling to $US100 ($A134) a tonne by quarter four of 2022 as iron ore supply increases next year and as Chinese steel demand eases,” he said.

“If the policy to cap China’s steel output in 2021 at 2020 levels is enforced fully, we could see iron ore prices fall more steeply than our forecast and for iron ore price volatility to remain skewed to the downside.”

Iron ore made a record breaking $149 billion from Aussie exports last financial year.

Its story was part of a bumper year with a whopping $A310 billion raked in from Australian exports from mining and energy, including coal and copper, according to estimates from the Department of Industry, Science, Energy and Resources.

Australia’s booming exports were expected to continue into the 2021-22 financial year, with predictions it would top $A334 billion.

Although iron ore was expected to dip with its earnings to top $A113 billion, it remains to see whether the export’s price can be maintained at record levels.

Originally published as China policy bites as Australia’s iron ore price drops 9 per cent