China is the world’s largest consumer of iron ore, and despite being the third largest producer, it still imports around 80% of the iron ore it uses each year. The biggest producers of iron ore are Australia, Brazil and China, which collectively account for around two-thirds of global output, with India, Russia, Ukraine and Canada also significant producers, according to the U.S. Geological Survey Mineral Commodity Summaries 2022.

China imported a total of 1.12 billion tons of iron ore in 2021, down slightly from 1.17 billion tons in 2020, according to government data. The drop in demand was largely driven by lower steel production in China, as the government placed constraints on the industry in a bid to reduce carbon emissions.

Going forward, China’s demand for steel, and by extension iron ore, could be impacted by conflicting factors. On the one hand, the country’s zero-COVID policy could lead to ongoing lockdowns, particularly in the face of the highly contagious omicron variant, which would impact economic activity and reduce demand. On the other hand, with data for March 2022 pointing to slowing economic growth, the government is set to introduce stimulus measures to boost the economy. The Communist Party’s Politburo recently stressed the importance of meeting annual economic goals, and increasing infrastructure construction to help boost growth. A rise in infrastructure construction would boost demand for steel, and its raw ingredient, iron ore.

Over the medium term, China has set the goal of significantly increasing its iron ore self-sufficiency. In the 2021-25 Raw Material Development Plan, it set out plans to increase domestic mining and raising the use of scrap steel. Until this goal is achieved, China remains heavily dependent on imports, with 60% of shipments coming from Australia.

Price volatility extends to the spread between China’s seaborne and portside iron ore market. Seaborne iron ore has a lead time of one to two months and reflects future supply/demand, with prices quoted in U.S. dollars per dry metric ton. By contrast, portside iron ore has a shorter lead time, typically of just a few days, meaning its price reflects the current supply/demand situation, while prices are quoted in renminbi (RMB) per wet metric ton, with VAT and port fees included in the price.

The portside market has been growing in importance in recent years both for price discovery, as the portside market reflects domestic demand more closely, and direct RMB-denominated sales of landed cargoes by international companies. Another advantage is that trading of portside iron ore can be done for smaller volumes and with less onerous financing arrangements, while the market tends to move faster than the seaborne one, making it more responsive to changes in demand.

The spread between the portside and seaborne market for iron ore can be volatile, due to factors ranging from shipping times, to foreign exchange rates, to financing. In recent weeks the discount of portside prices to seaborne ones has narrowed significantly, largely due to weaker than anticipated demand for iron ore in China following COVID-19 lockdowns. The situation is a significant reversal of much of 2021, when portside iron ore traded at a premium to seaborne, before a build-up of portside stocks triggered the shift to a discount.