The August drop was particularly acute in the EU (-13.3% y-on-y), the CIS (-22.4% y-on-y) and to a lesser extent in Japan (-7.4% y-on-y) and in the USA (-7.1% y-on-y).

China’s steel production showed a surprising 0.5% y-on-y bounce, although January-August output is posting a 5.7% y-on-y decline. After a summer marked by maintenance shutdowns, blast furnaces, especially in Northern China, restarted, despite weak prevailing demand. Margins, although barely positive, have stabilised, thanks to lower material costs, primarily iron ore. Meanwhile, steel inventories remain low, because of lower production during most of the summer.

The outlook for the rest of the year remains bleak. September and October, traditionally strong for the construction sector, have seen subdued activity as the Chinese economy remains impacted by its ‘zero-COVID’ policy and a depressed property market. Average new home prices in China's 70 major cities dropped by 1.3% y-on-y in August, the fourth straight month of decrease, and the fastest drop since August 2015. It is unclear if China’s zero-COVID policy will be relaxed after the October Communist Party meeting, and any material rebound in the economy is unlikely to take place before the 2023 Lunar Holiday.

Steel production in the rest of the world will remain weak, especially in Europe. During the January-August period, EU steel production declined by 6.9% y-on-y, a drop poised to increase amidst incoming recession and an energy crisis. Arcelor Mittal alone is reported to have idled 7Mtpy of capacity and other steel mills are following. Steel production in the USA posted a limited 3.7% y-on-y drop for the first eight months of the year, although the economy’s resilience will be tested by the Fed's monetary policy. The only areas showing rising steel production in 2022 have been India and the Middle East, the former relatively insulated by its domestic market, the latter benefiting from high energy prices.

With China remaining the main driver, the iron ore market has been trending downwards over the past months, fluctuating on blast furnace operating rates and port stock changes. Project Blue believes that subdued demand in Q4 and steady shipments – primarily due to seasonality – will cap iron ore prices at their current levels (~US$100/dmt). Low steel margins have triggered an increased usage of lower grade ore (58% Fe), narrowing the discount to the 62% Fe benchmark to below 10%. However, the arrival of winter could trigger sintering restrictions in China, in line with environmental restrictions, which would translate into rising demand for higher-grade ores, including lump and pellets, and imply higher premia.

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