Benchmark iron ore futures in China dropped almost 6% on Wednesday after the country urged the steel industry to produce less crude steel next year amid the government’s carbon neutrality plan.
Iron ore prices have more than doubled in 2020, putting the steelmaking raw material on track to be the top-performing major commodity globally for a second straight year as speculative money floods in and Chinese demand holds firm.
But the Ministry of Industry and Information Technology called on the steel sector to “resolutely” cut crude steel output and ensure an annual drop in 2021.
The most active iron ore futures on the Dalian Commodity Exchange have gained 37.8% this quarter and 21.5% in December alone.
As the world’s largest producer of steel at 1.1 billion tonnes in 2020, China has shut down 150 million tonnes of annual production capacity from 2016-2020.
“Output cut can further improve the steel sector’s supply and demand situation… break and ease issues of deformed profits due to high raw material prices,” CITIC Securities told Reuters.
Reasonable control of steel production can safeguard profit margins of mills and prevent high prices from getting transferred to the downstream sectors, CITIC added.
The most-traded iron ore futures on the Dalian Commodity Exchange, for May delivery, closed down 3.5% to 984 yuan ($150.65) a tonne, the lowest in nearly three weeks.
Coking coal futures were down 3.3% to 1,641 yuan per tonne, after shedding 4.7% in early trade. Dalian coke futures slipped 0.1% to 2,822 yuan a tonne.
President Xi Jinping announced in September that China plans to go carbon-neutral by 2060. The country is the world’s largest energy consumer and greenhouse gas emitter, it mines and burns half the world’s coal, and is the top importer of oil and natural gas.
Transitioning the Chinese economy to carbon-neutrality within a few decades could cost $5.5-trillion, Sanford C. Bernstein & Co estimates.
(With files from Reuters)