World crude steel production declined 5.9% y-on-y in June and 3.3% y-on-y in China. For H1 2022, the respective y-on-y drops were 5.5% and 5.6%. Lower steel production reflects the deteriorating macro environment, the Ukrainian conflict and China’s zero-COVID policy.    

The decline in steel production was particularly acute in the EU (-12.2% y-on-y in June and -6.2% y-on-y in H1), in the CIS region (-34.3% y-on-y in June and -18% y-on-y in H1) and in Japan (-8.1% y-on-y and -4.3% y-on-y in H1). The USA saw declines of -4.2% y-on-y in June and -2.2% y-o-y in H1 while in Latin America, the declines were similar (-4.9% y-on-y in June and -2.8% y-on-y in H1).  Meanwhile, India posted a steel production increase of 6.3% y-on-y in June and 8.8% y-on-y in H1, given its insulated economy. Overall, the world ex-China recorded drops of -9.1% y-on-y in June and -4.2% y-on-y in H1.

The outlook for H2 is not encouraging. The Ukrainian conflict has no end in sight and Europe is facing a recession and an energy crisis. The US economy appears resilient although it is unclear whether it will fight off recession and withstand the impacts of the Fed's aggressive monetary policy.  And despite weak (0.4%) GDP growth in Q2 and growing difficulties faced by property developers, China does not seem likely to change course on its zero-COVID policy.  

Weak demand and depressed margins have driven Chinese mills to conduct maintenance work and blast furnace utilisation rates dropped to 84% in July while electric furnace utilisation rates declined to 32%.  It was estimated that about 90% of steel mills in China were unprofitable in July.

Although a drop in iron ore prices recently brought some relief, the rainy summer months with continue to keep construction activity low and steel production will remain subdued until at least September. Annualised production suggests 1,050Mt in 2022, but Project Blue sticks to its 1,020Mt forecast, with downside risk.

Iron ore shipments are rising, due to seasonality and operational improvements at Rio Tinto with the commissioning of the new Gudai-Darri mine and at Vale with recovering production at its Southern and South-eastern systems. Increased shipments and lower demand contributed to a rebound in Chinese port stocks to 130Mt vs 120Mt in early June.

The iron ore price dropped below the US$100/t mark as markets are increasingly concerned about the Chinese economy and sceptical about a quick turnaround in China's zero-COVID policy. More than ever, iron ore's short-term price movements will depend on the Chinese news flow.