Ground Breakers: The Winter Olympics are here and this is why it’s a big deal for the iron ore market

The Winter Olympics are back and we have the opportunity to develop short, passionate obsessions about sports that we will forget within a month.

Ground Breakers: The Winter Olympics are here and this is why it’s a big deal for the iron ore market

The Winter Olympics are back and we have the opportunity to develop short, passionate obsessions about sports that we will forget within a month.

But for how long?

The Protect Our Winters environment group and the Sport Ecology Group at Loughborough University, England released a research report ahead of the Beijing Games. It states that 11 of the 21 cities that have hosted the Beijing Games since 1924 won't have enough snowfall by 2050 due to global warming.

Beijing's Paralympics and Olympics will use almost 100 percent artificial snow. This has raised concerns about China's water supply and environmental impacts. China has shrugged off these concerns like a Jedi mind trick.

The Chinese are also concerned about appearances and blue sky. This is something that has seen activity from China's heavily polluting steel sector - which accounts for approximately 15% of China’s greenhouse gas emissions – wind back.

The Winter Olympics and the aftermath of them may be the most closely watched business event of the year.

Iron ore prices defy bearish fundamentals
The 2022 iron ore outlook will not be fully understood until after February's Winter Olympics (Feb 4--20) and the Paralympics (March 4--13).

After achieving record production levels in the first half last year, the Chinese government placed restrictions on Chinese steel production for the second half 2021.

China's crude steel production in 2021 was around 1.033Bt, 3% less than its 2020 record of 1.0565Bt.

This has brought prices down to record levels of US$237/t and US$87/t in November. However, they are now rising amid hopes of a Chinese economic recovery, restocking ahead Lunar New Year, the Winter Olympics and Covid.

Iron ore is now trading at around US$140/t. The fate of iron ore will depend on what the Chinese Government does with its steel industry following the Games.

Already, the Olympics are expected to be a slow period for steel production. A survey by consultancy MySteel indicates that blast furnaces in Tangshan may be reduced from 78% to 63% utilisation during the Olympics.

China has yet to set a clear goal like it did last year. Iron ore market watchers will be closely monitoring government communiques to see where they are going.

Ex-China steel growth strong in 2021
Despite China's decline in steel production at nearly 60%, there is still a market for steel outside of the Middle Kingdom. This could help to mitigate economic headwinds.

The World Steel Association reported last month that global steel production reached a record 1.95Bt due to a 13.2% increase in post-pandemic output outside China. This is 4.2% more than the 1.88Bt recorded in 2020.

Vivek Dhar, a Commbank analyst, predicted that non-Chinese production would need to increase further in order to maintain the market's growth in 2022.

He said that "steel output limitations will likely continue even après the Winter Olympics, as policymakers seek to reduce emissions further."

"However these restrictions, just like last year will likely be enforced during the second half.

"Steel output growth in China declined in December, both year-on-year and relative to December 2019" Given China's steel policy, a pick-up in momentum is likely to be required for global steel output to rise this year.

Platts analysts are optimistic about the outlook for post Olympics, especially for low alumina fines. Due to Brazil's supply problems, differentials for low-alumina products reached 3.5 year highs on Jan 26. This was due to the prominent producer of low-alumina products.

Market sources predict that there will be a healthy demand for iron ore and steel after the Winter Olympics, given China's supportive macroeconomic policies. They said that iron ore prices, particularly the low-alumina, could be supported if Chinese steel margins improve."

Dhar stated that decarbonisation efforts in China, Japan, and South Korea, which together accounted for 80% and 7% respectively of Australia's ironore exports in 2021, were the greatest threat to the traditional steel supply chain.

A commercial route for low-emission steel production will take at most a decade to develop. This could lead to a shift from the Pilbara's lower-grade ore.

Dhar stated that reducing carbon emissions in the steel industry will likely lead to a greater preference for high-grade iron and products such as iron ore lumps and pellets.

Market shrugs shoulders and South32 leads the big miners
The Materials index is down 0.2% in early trade. This was due to slight losses for Rio Tinto and BP (ASX.BHP).

South32, ASX:S32 was the leader in large caps after aluminium prices rose by more than 2% to US$3050/t.

ANZ Head of Australian Economics David Plank stated that comments made by Rusal Russia about a market with a deficit of 1.7Mt in 2022 led the increase.

In recent months, Europe and China have experienced significant production drops due to power shortages.

"The market is also prepared for more supply disruptions should Russia occur."
Plank stated, "Invade the Ukraine."

Russia is second in the world behind China as a producer. We expect global inventories will continue to fall, which should support price."

Russia's potential sanctions could have an impact on the nickel and palladium markets. Nickel prices rose 29% in January.

Russia's Norilsk is the largest supplier of palladium sulphides and nickel sulphides.