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China to revoke over 1,000 iron ore mining licences amid pollution crackdown

Pollution in China’s cities… Not a pretty sight. (Image: oceanfishing | Shutterstock.)

Iron ore prices resumed their downward trend Wednesday after China announced it would revoke about a third of its iron ore mining licences, mostly belonging to small polluting operations amid a government-led crackdown on smog and outdated steelmaking capacity.

Lei Pingxi, chief engineer at China’s Metallurgical Mines Association, said the measure would affect about 1,000 small mines, most of which have tried bypassing Beijing’s efforts to improve air quality by closing briefly and so survive inspections.

Those operations, however, will now be forced to upgrade their production processes or face permanent closure, Reuters reports.

Further falls are predicted in the price of iron ore to around $60 a tonne by the end of the year, as China also enforces environmental restrictions on steel production.

Iron ore prices fell on the announcement. After jumping 3% to $64.95 a tonne on Tuesday — its largest one-day percentage increase since August 31 — ore with 62% content in the port of Qingdao fell again Wednesday, to $64.15 a tonne, according to Metal Bulletin.

Further falls are predicted in the price of iron ore to around $60 a tonne by the end of the year as China also enforces environmental restrictions on steel production, according to analysts.

Goldman Sachs, for one, believes the price is “sitting at the intersection between policy and demand” and that China is likely to enforce steel output restrictions, which would likely reduce demand.

“This has not been fully priced in our view, and we see room for iron ore prices to fall further,” Goldman Sachs said in a report released earlier this week.

“The July and August iron ore rally illustrates the impact of policy anticipation.”

But Beijing’s decision to shut down polluting producers could bring benefits to iron ore exporters.

China’s mines produce some 350 million – 400 million tonnes a year on a 62% Fe-basis. Around one-third of the many small mines struggling with low iron ore content (average close to 20%) have costs per tonne of more than $100.

The bulk of Chinese fines require a process called sintering (fines are mixed with coking coal and partially smelted) before being fed into blast furnaces, which greatly adds to the steel industry’s environmental impact.

In the past year, the nation’s steelmakers have been substituting domestic supply and reducing the percentage of fines in favour of pellets and so-called “lump” ore from Australia, South Africa and South America, which lowers costs and cuts pollution by reducing the need for sintering.

You’d think China would now need to import more iron ore, but when factoring in Beijing’s fresh anti-pollution measures affecting the steel industry, the truth is that demand is likely to drop at a time when global mine supplies are poised to expand, Goldman Sachs noted.