Chinese Iron Ore Traders Bet On Price Rebound

Despite the global steel industry's drastic decline, and serious production surpluses in China's steel industry, China's iron ore imports in April rose 9.45%, month on month, and 33%, year on year, to set a record high. In the first four months of 2009, China imported 188.46 million tons of iron ore, up 22.9%, year on year, most of which was imported not by steel makers but by iron ore dealers. After entry into China, it was promptly arranged into piles in China's ports, where it sits.

China imported 57 million tons of ore in April alone, and annual imports will reach around 700 million tons if that monthly amount remains unchanged, accounting for over 80% of the world's annual iron ore production. “This is a terrible number,” said Shan Shanghua, secretary general of China Iron and Steel Association (CISA).

In May, 2008, the outsized iron ore inventory in Chinese ports forced the National Development and Reform Commission, steel enterprises, iron ore dealers, and others involved to jointly work to clear them up. One year later, CISA is having to start the process over again to get rid of the imported iron ore in the ports without buyers.

A big reason for exploding ore imports is that dealers are buying in iron ores at low prices, betting on a future price hike. Small steel manufacturers are using imported ore with lower prices to support their production, which is stimulated by demand in the low-end market. Yet another reason is that the current sea freight prices are low, and iron ore miners that are unwilling to steeply cut their production due to the demand decline on global markets are transporting the ore to China before finding buyers. Now iron ore inventories in ports in northern China are getting out of hand.

Among the present 10 top importers, six are iron ore dealers, while in previous years there were usually only two or three dealers among the top 20. This year the top five importers are all mineral dealers, including China Minmetals, Sinosteel, and RGL. Steelmakers’ iron ore imports are of recent quite low as they are still working through inventories bought at high prices.

Meanwhile, mounting inventories in ports are creating a dilemma for large iron ore dealers. “A dealer has imported two shiploads of iron ore with FOB price of only a bit over 600 yuan per ton. Now this ore has been stored in a port for over a month, at $70,000 to $80,000 a day. Do you think the company should sell this ore at a price lower than its costs or wait until the iron price rebounds?” queried an industry insider.

Oddly enough, many small and medium-sized steel companies in northern Hebei Province are having difficulty in buying iron ore. They are finding that most of the ore stored in the ports is not for sale.

Even during the steel industry boom between 2003 and 2005, average monthly port inventory was only 34 million to 36 million tons. According to current production and market capacity, the present iron ore inventory is absurdly high.
It is estimated that only 25-30 million tons of the iron ore imported in April has been sold.

Shan Shanghua blamed the high inventory on overseas iron ore dealers. “China will never need so much iron ore. I think overseas dealers are speculating on the Chinese market, which is against market rules. It is messing up the domestic market and encouraging small and medium steel makers to expand production regardless of market demand.”

The ongoing iron ore negotiation is also being affected. BHP Billiton, Rio Tinto, and Vale are now saying they will only accept a 20% price cut. Some steel companies have signed letters of credit according to this discount and sent ships to transport iron ore from Brazil and Australia. The three mining giants are now trying to reach agreements with separate Chinese steel makers.

And the three miners have begun to sell more goods to dealers. Some people involved in the iron ore negotiations consider it a conspiracy, in which they are trying to convince Chinese steel makers and iron ore exporters that the price has bottomed out and may rebound.

But the three suppliers estimate that according to China's steel production in the first quarter, the total production in 2009 may reach as high as 520 million tons, much higher than CISA's target production volume, which stands at 430 million tons.

According to CISA's statistics, in the first quarter global crude steel production dropped 22.92%, year on year. Production in Europe, North America, Japan, and Korea dropped by 43.05%, 52.84%, 42.94%, and 21.73% respectively, but grew 1.39% in China.

Source: China Stakes