The drop in production was across the board, a reflection of the deteriorating global environment. Steel production in Ukraine was down 86% y-on-y due to the conflict having destroyed critical infrastructure, while China’s steel output fell 5.2% in the midst of its ‘zero-COVID’ policy. Steel production also dropped 5.4% y-on-y in the EU, 3.9% in the USA and 4.4% in Japan. One exception is India, where steel output rose 6.2% y-on-y.

Chinese trends remain the most important to monitor. During the first four months of the year, China's steel production dropped 7.8% y-on-y to 339Mt. If annualised, production would just exceed 1Bnt, compared to 1,033Mt in 2021. Pig iron production was flat in April but down 6.9% y-on-y over the January-April period.

The second quarter is usually the strongest, driven by the construction sector. Although we expect that the Chinese government will, at some stage, relax its ‘zero-COVID’ policy, its initial 2022 GDP growth target of 5.5% looks unachievable and 2022 production will be, almost certainly, lower than in 2021. The recent mortgage interest rate cut from 4.6% to 4.45%, aimed at supporting the property sector by reducing home loan costs, is a positive step but may not be sufficient to be effective.

Outside of China, developed economies remain impacted by the Ukrainian conflict, surging inflation and aggressive monetary tightening, issues which are likely to perdure for most of the year, clouding market sentiment and consumer confidence.

All these developments point toward weak demand for iron ore in 2022. However, the price of iron ore continues to be supported by supply issues. Production from the major miners remains below potential, impacted by supply chain and operational issues as well as by labour constraints, with downside risks on their 2022 production guidance.

India just announced an increase in its iron ore export duties, from 30% to 50% for fines and concentrates and from 0% to 45% for pellets. The hike applies to all grades, including lower grade ores (<58% Fe), mostly produced in Goa state and exported primarily to China. The ore from Goa, which has a low usage in India, bore no export duty since 2016. Indian exports accounted for about 3% of China’s iron ore imports in 2021 and higher export duties will cause Indian exports to fall.

Project Blue’s outlook for iron ore remains unchanged. We expect weak iron ore demand stemming from a lower global steel and pig iron production but also constrained iron ore supply. A scenario based on a material rebound in steel production in China would bring the iron ore price back to US$150-160/dmt. A more subdued economic environment would keep iron ore prices ranging US$110-140/dmt, with downside risks.

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