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Iron ore production not keeping up with steel: Reuters

The world’s steel mills are churning out crude steel at a rapid pace, say the latest numbers from the World Steel Association.

Reuters said first-half figures showed higher year-on-year production in all regions with the exception of Africa, where a 16.9-percent slide reflects the economic tailwinds following months of political turmoil across North Africa.

That should be good news for iron ore giants like Vale and Fortescue, except that the supply of iron ore is having a tough time keeping up with the demand for the crucial steel-making ingredient.

According to Reuters, the growth in supply at this point in the year is somewhat surprising, since third quarter demand for steel normally slows during the northern hemisphere’s summer. The explanation is found in China, which hit an annualized record high of 720 million tonnes in June, based in part on Beijing’s social housing construction program.

Feeding Chinese steel mills with iron ore is proving to be no easy task, however. While analysts predict a surge of supply into the iron ore market by 2014-16, the current situation has the market struggling to meet demand. Says Reuters:

While Chinese steel production rose by 11.9 percent in the first half of this year, imports of iron ore rose by just 8.2 percent.

Rather than Chinese buyers reducing purchases in the face of high prices, this was more a case of supply-side hits limiting exports from key origin countries.

Researchers at Macquarie Bank estimate that global volumes of seaborne iron ore contracted by 1.5 percent in the first half of this year relative to the prior six months.

The problems can be attributed to rain and flooding in Brazil and Australia in the first quarter, as well as the ban on iron ore exports from India’s Karnataka state, China’s third biggest supplier of iron ore. To meet the shortfall, China is turning to smaller iron ore producers like Canada and Russia, whose exports to China have surged in H1 2011, and to itself, according to Reuters:

National iron ore production jumped by 22.0 percent year-on-year in January-June as smaller operators capitalised on strong prices.