Higher Chinese Iron Ore Imports Are Not Necessarily Green Shoots

I pulled an interesting point from Citi's latest June 10th Iron Ore piece by Alan Heap regarding BHP, Rio Tinto, and CVRD. It is a warning signal for those who see a higher BDI and higher Chinese iron ore imports as a "green shoot".

At one point he explains in the piece, that while Chinese imports of iron ore have been up 25% YTD, Chinese steel production has only been up 3%. What makes up the difference? Falling domestic iron ore production plus some inventory build. Note I have provided links to online sources with similar numbers to what Citi has, just to give some verification beyond the report. 

My addition to the Citi point is that it shows that an increase in Chinese demand for seaborne iron ore doesn't necessarily mean an increase in total Chinese demand. You would want to see steel production increasing in a similar fashion in order to claim that higher Chinese ore imports were a sign of growth. So while other green shoots may exist in the world, higher Chinese seaborne iron ore imports YTD isn't one of them. This also sheds some light on the recent BDI rally and why it may be a fake-out.

Update: For BDI speculators especially, it also doesn't help that the Chinese government is trying to curb steel growth with a target of 8% lower steel production this year.

The government wants to cap this year's total steel output at 460 million tonnes, 8 percent lower than last year, but it has so far been unable to rein in the sector...

Last month, the Ministry of Industry and Information Technology urged commercial banks to cut off credit to steel enterprises that are "blindly expanding in disregard of the market".

It said the industry has been put under intense pressure as a result of excessive iron ore import growth and an oversupplied domestic market.

But while calls to curb output might be heeded by the big firms, smaller operators are still unlikely to follow suit, said Sun Jiqing, analyst with China's Dongxing Securities.

"The effects of output restrictions will be limited, with domestic investment stimulated by government policy and high demand for construction materials, and you also have local governments chasing GDP, jobs and revenues during the world financial crisis," he said in a note.

While there are limits to the government's ability to control output, the government can at the very least present a strong headwind for steel production growth, and in turn, future Chinese iron ore demand growth.