Source:Reuters
A slide in iron-ore prices to three-year lows is forcing many high-cost miners in top consumer China to curb output, industry sources say, in a move that could reduce the surplus in a market weighed down by near record Chinese stocks.China produces about one-billion tons a year of iron ore and buys 60% of the steelmaking raw material traded globally. But a slowdown in its economic growth has undermined demand assumptions and hit prices hard: iron ore fell last week to $86.70 a ton, a level unseen since October 2009.Traders and major miners have been waiting for evidence that China is cutting output to help rebalance supply with the slowdown in demand from steel mills.Chinese ore has a lower iron content compared with many other countries so producers spend more to extract the mineral compared with global miners such as Vale, Rio Tinto and BHP Billiton .
That means they feel the pinch sooner when prices fall. State-run, mid-sized firm MinmetalsLuzhong Mining has cut production to around 4 500 tons a day from around 5 000 to 6 000 tons, said a company official who declined to be named because he was not authorised to speak to media. "There is a growing number of domestic mines cutting production, as steel mills are just not purchasing," the official said. "We find it difficult to sell." The official said many miners with an annual capacity of 200 000 to 300 000 tons in northeastern China, a major iron ore mining region, have stopped production. Some in top steel producing northern Hebei province have also halted mining, the official said.
Chinese industry consultancy Umetal showed in a recent survey that 38% of 50 mines with an annual capacity of below 300 000 tons and processing plants polled had halted production, most of them in Hebei province and in northeastern China. Around 60-70 percent of private iron ore processing plants in eastern Shandong and Hebei provinces have also stopped operations, in dustry sources said. "There is no market at all, except for our long-term customers. We are also slowing down our processing rates now," said an official at a mine in Shandong that has an annual iron ore output of 600,000 tonnes.
SLOWING DOWN:Raw iron ore in China has about 15% iron content on average compared to around 60% for material found in Australia and Brazil. That makes China"s production cost between $110 and $140 per tonne compared to about $40-$50 a tonne in the world"s top two exporting countries. Iron ore with 62% iron content , the industry benchmark, bounced back from last week"s lows to $95 a tonne on Monday, but it is still down by nearly a third from early July. China"s iron ore output dropped by 10-million tons to 115-million tons in July from June, b efore rising by a modest one-million tons in August. Production cuts may take time to have an impact on the market because iron ore stocks are relatively high in China. Inventories of imported iron ore at major ports are around 97 million tonnes , near a record high of 101 million tonnes in February and equivalent to about 1-1/2 months of imports.
Globally, the market is likely to be in surplus supply of around 4 million tonnes this year, said JiroIokibe, senior analyst at Daiwa Capital Markets in Tokyo. Iokibe expects the surplus to rise to 28-million tons in 2013 and to 53-million tons in 2014 due to growing capacity in Australia and Brazil, planned on the basis of China"s once-voracious appetite. "People have been investing in iron ore mines as almost an essential thing, so we"ve got capacity available now based on an assumption that China would keep growing at this rapid rate," said Peter Fish, managing director at British steel consultancy MEPS. "I think that was a misjudgment." So far, Vale, Rio Tinto and BHP Billiton have not curbed output, although fourth-gest miner Fortescue Metals Group has said it would slash capital spending by a quarter and scale back a planned increase in near-term output to 115-million tons from 150-million tons."The market requires some larger producers to pull back in order to restore profitability," said Fairfax I.S. analyst John Meyer.