Brazil’s mining giant Vale could be hit by lower steel production in China

RIO DE JANEIRO, BRAZIL – Iron ore extended its losses on a warning from Australian miner BHP that it expects “severe cuts” in Chinese steel production to become increasingly likely this year. The move could impact production at Vale S.A., the world’s largest mining company.

The prospect of significantly lower steel output in the second half of the year “tests the bullish resolve of the futures markets,” BHP wrote in a commodities landscape report on its website. The price of iron ore traded in Singapore has fallen about 30 percent since its peak in May.

China’s steel industry is under pressure, after it pledged to curb production this year. Data released Monday showed production fell more than 8 percent in July from a year earlier. That target calls for massive cuts in the second half of the year to offset supply expansion in early 2021.

Iron ore futures in Singapore fell 3.5 percent to US$152.7/ton at 3:36 PM local time, heading for a fifth weekly low. In China, futures lost 2.5 percent to close at their lowest level since November.

Steel futures in Shanghai also posted losses, with hot-rolled coil down 3.3 percent and rebar down 3.8 percent.

While much of investors’ attention in the second half of the year will be focused on production constraints in China, demand trends in that country will also be important. The government in Beijing is promoting several measures to curb the real estate sector, which accounts for much of steel consumption and has traditionally contributed to the rise in iron ore prices.

“The authorities are clearly concerned about the overinvestment and credit risk concentrated in the real estate sector,” Commonwealth Bank of Australia wrote. And even as China takes more pro-growth measures to combat the recent slowdown, “there is a good chance that the real estate sector will be left behind.”