Iron Ore And The US Steel Tariff

Commodities | Mar 06 2018

The iron ore market is unlikely to be affected by US tariffs on imported steel, while the focus remains on the sustainability of low-grade supply.

-ROW should be able to absorb excess supply of steel if US imposes tariffs
-Development expenditure on iron ore in China declines significantly
-Cost inflation creeping back into iron ore market


By Eva Brocklehurst

Will the imposition of US tariffs on imported steel weigh on global steel demand and, by default, iron ore? US president Donald Trump has said he prefers global tariffs on both steel and aluminium imports of 25% and 10% respectively. Macquarie notes, if these were the actual tariffs imposed, they would exceed the most severe option presented by the Commerce Department. The president has until April 11 to decide on steel.

Actually, Commonwealth Bank analysts don't expect the tariffs to be that disruptive to either steel or iron ore markets. US steel prices are expected to increase but the rest of the world should be able to absorb the excess supply of steel, particularly Southeast Asia. If this is the case, iron ore markets can also absorb the tariff changes.

Nevertheless, the analysts point out that stronger US steel output at the expense of production elsewhere would be more negative for iron ore consumption, because US steel is predominantly produced via electric arc furnace and this uses less iron ore than the basic oxygen furnace process. The basic process accounts for around 75% of global steel production and is the primary driver of iron ore consumption.

Global steel production rose just 0.8% for the year to January, with China's output declining -0.9% because of reductions during the winter. This was offset by the rest of the world growing at 2.5%. Meanwhile, Citi notes, the iron ore price has displayed resilience in the mid-to-high US$70/t range.


Capital expenditure on iron ore mining in China dropped -23% in 2017, despite a recovery in the iron ore price. Citi points out the absolute peak in iron ore mining expenditure occurred in 2014 in China, and since then the growth rate has slowed to 5% per annum.

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