China Restricts Some Steel Production

China’s efforts to drastically reduce pollution levels could lead to lower demand for iron ore, a raw material for the steel industry, which is a big source of the nation’s harmful emissions.

It hasn’t happened yet, however. “With the Chinese economy almost fully recovered from the pandemic, demand for steel is very strong,” which means that demand for iron ore is also very strong, says John Kartsonas, a managing partner at Breakwave Advisors, the advisor for the Breakwave Dry Bulk Shipping exchange-traded fund (ticker: BDRY).

At the same time, iron-ore supply remains tight, with Brazil, a major producer of the commodity, not fully recovered from a deadly accident two years ago that hurt production, he says. In 2019, Vale halted some mining operations following a fatal dam breach in Brazil, leading to significant declines in its iron-ore output. Vale pegged its production of iron-ore fines at 300.4 million metric tons in 2020, compared with nearly 384.2 million metric tons in 2018.

Tight supplies and rising demand helped lift the most-active futures contract for 62% iron-ore fines delivered to China to US$174.94 per metric ton on March 4, the highest settlement since August 2011, based on Dow Jones Market Data reports going back to October 2010. That’s not far from the record-high settlement of US$188.88 from February 2011.

China produced more than one billion metric tons of crude steel last year, and there are “no iron-ore projects that will produce sizeable net new tons for at least five years,” says Paul Bartholomew, a metals analyst at S&P Global Platts. Expectations for further Chinese economic stimulus are also positive for steel and iron-ore demand, he says.

Iron-ore prices, however, have eased in recent days on prospects of a slowdown in demand, as China plans to reduce factory activity to cut carbon emissions. The March contract was at US$168.26 on March 16, trading 2.6% lower month to date.

Tangshan, a city in China’s Hebei province referred to as the nation’s steelmaking hub, has ordered factories to limit or halt production on days when a heavy-pollution alert is in place, to cut overall emissions by 50%, according to the South China Morning Post.

“Steelmaking is a major source of pollution in China, estimated to account for about 15% of the country’s total emissions, so it is hardly surprising investors took profits at the prospect the steel industry could be facing significant environmental controls,” says Stuart Burns, editor at large for metals analysis provider MetalMiner. “The first casualty of reduced steel production would be demand for raw materials,” he says.

Still, China might not be able to fully implement restrictions on steel production. Reducing steel output may be “difficult to achieve this year,” says Bartholomew. In the past, many facilities taken offline were already “mothballed or uneconomic,” he says. “It’s harder to close production when mills are operating and making money.”

The VanEck Vectors Steel ETF (SLX), which provides exposure to companies involved in the steel sector, has climbed about 10% this month.

Given China’s restrictions on operations of some highly pollutant steel mills, however, Breakwave’s Kartsonas says he is now “a bit more cautious” on the outlook for iron-ore prices.

Brazil has signalled an increase in iron-ore production. That, in combination with China’s pollution restrictions, could lead to “more moderate” prices in the next several months, he says. Still, if demand for construction continues to support steel, that means iron-ore prices can remain “higher than historical averages for a long time.”

First, the good news for office landlords: A post-Labor Day bump nudged return-to-office rates in mid-September to their highest level since the onset of the pandemic.

Now the bad: Office attendance in big cities is still barely half of what it was in 2019, and company get-tough measures are proving largely ineffective at boosting that rate much higher.

Indeed, a number of forces—from the prospect of more Covid-19 cases in the fall to a weakening economy—could push the return rate into reverse, property owners and city officials say.

More than before, chief executives at blue-chip companies are stepping up efforts to fill their workspace. Facebook parent Meta Platforms, Amazon and JPMorgan Chase are among the companies that have recently vowed to get tougher on employees who don’t show up. In August, Meta told employees they could face disciplinary action if they regularly violate new workplace rules.

But these actions haven’t yet moved the national return rate needle much, and a majority of companies remain content to allow employees to work at least part-time remotely despite the tough talk.

Most employees go into offices during the middle of the week, but floors are sparsely populated on Mondays and Fridays. In Chicago, some September days had a return rate of over 66%. But it was below 30% on Fridays. In New York, it ranges from about 25% to 65%, according to Kastle Systems, which tracks security-card swipes.

Overall, the average return rate in the 10 U.S. cities tracked by Kastle Systems matched the recent high of 50.4% of 2019 levels for the week ended Sept. 20, though it slid a little below half the following week.

The disappointing return rates are another blow to office owners who are struggling with vacancy rates near record highs. The national office average vacancy rose to 19.2% last quarter, just below the historical peak of 19.3% in 1991, according to Moody’s Analytics preliminary third-quarter data.

Business leaders in New York, Detroit, Seattle, Atlanta and Houston interviewed by The Wall Street Journal said they have seen only slight improvements in sidewalk activity and attendance in office buildings since Labor Day.

“It feels a little fuller but at the margins,” said Sandy Baruah, chief executive of the Detroit Regional Chamber, a business group.

Lax enforcement of return-to-office rules is one reason employees feel they can still work from home. At a roundtable business discussion in Houston last week, only one of the 12 companies that attended said it would enforce a return-to-office policy in performance reviews.

“It was clearly a minority opinion that the others shook their heads at,” said Kris Larson, chief executive of Central Houston Inc., a group that promotes business in the city and sponsored the meeting.

Making matters worse, business leaders and city officials say they see more forces at work that could slow the return to office than those that could accelerate it.

Covid-19 cases are up and will likely increase further in the fall and winter months. “If we have to go back to distancing and mask protocols, that really breaks the office culture,” said Kathryn Wylde, head of the business group Partnership for New York City.

Many cities are contending with an increase in homelessness and crime. San Francisco, Philadelphia and Washington, D.C., which are struggling with these problems, are among the lowest return-to-office cities in the Kastle System index.

About 90% of members surveyed by the Seattle Metropolitan Chamber of Commerce said that the city couldn’t recover until homelessness and public safety problems were addressed, said Rachel Smith, chief executive. That is taken into account as companies make decisions about returning to the office and how much space they need, she added.

Cuts in government services and transportation are also taking a toll. Wait times for buses run by Houston’s Park & Ride system, one of the most widely used commuter services, have increased partly because of labor shortages, according to Larson of Central Houston.

The commute “is the remaining most significant barrier” to improving return to office, Larson said.

Some landlords say that businesses will have more leverage in enforcing return-to-office mandates if the economy weakens. There are already signs of such a shift in cities that depend heavily on the technology sector, which has been seeing slowing growth and layoffs.

But a full-fledged recession could hurt office returns if it results in widespread layoffs. “Maybe you get some relief in more employees coming back,” said Dylan Burzinski, an analyst with real-estate analytics firm Green Street. “But if there are fewer of those employees, it’s still a net negative for office.”

The sluggish return-to-office rate is leading many city and business leaders to ask the federal government for help. A group from the Great Lakes Metro Chambers Coalition recently met with elected officials in Washington, D.C., lobbying for incentives for businesses that make commitments to U.S. downtowns.

Baruah, from the Detroit chamber, was among the group. He said the chances of such legislation being passed were low. “We might have to reach crisis proportions first,” he said. “But we’re trying to lay the groundwork now.”

China Restricts Some Steel Production

How that will weigh on iron-ore demand.

Office owners are struggling with near record-high vacancy rates