China cuts iron ore offtake

Early indicator of West's recession impact on Asian economies price slump to stay awhile

The price of iron ore has declined to a 30-month low due to Chinese steel mills trying to offload existing stock before buying afresh and advancing by a month the maintenance shutdown to reduce losses on steel production.

Data compiled by Bloomberg showed while the benchmark iron ore with 63 per cent of iron content hit a low of $118.1 a tonne, the 62-grade also fell to $115.2 a tonne. These levels were previously seen in December 2009. The dip in demand from China, the world’s largest steel producer, indicates the ongoing economic downturn in America and the European Union has gradually begun percolating to Asian countries, including China and India. Consequently, it has lowered the economic growth (GDP) forecast for China and India to 7.5–8 per cent and 6.5 per cent, from over 10 per cent and eight per cent earlier, respectively.

Growth in an economy is closely linked with consumption of steel, due to the metal’s abundant use in creating and maintaining infrastructure. “There is no activity on the ground. Chinese demand remained totally absent,” said R K Sharma, secretary-general of the Federation of Indian Mineral Industries.

The Steel Index price for 62 per cent-grade ore declined for a 14th day, to $115.2 yesterday, its lowest level since December 29, 2009. The commodity price fell seven per cent last week. The price slump of iron ore in international markets will reduce India's role as a key exporter in Asian markets. Iron ore exports from all major ports declined by a third in the first quarter of the current financial year to 12.9 million tonnes.

Inventories of both iron ore and various steel products in China have swollen by up to 46 per cent so far this year to 100 million tonnes (mt) and 12.45 mt, respectively, counting major factories and ports. To avoid further restocking, the Chinese government has urged state-owned steel companies to make destocking a priority in the second half of the year. Consequently, steel mills are abstaining from fresh buying.

Also, Chinese small and medium-sized steelmakers accounting for about half of the country’s 550 mt of annual steel output, are stepping up maintenance, in an effort to cut production and stem losses from a slump in steel prices and a surge in inventories.

There is no recovery in demand for steel in sight and,hence, a large number of mills in China have begun idling some capacity, after having held output near record levels over recent months. An estimate says about a million tonnes of crude steel output will be cut by some time in August, on the basis of a schedule of mills' plans for maintenance.

Chinese steel mills typically do not shut down production outright because of the high costs involved. Instead, they resort to maintenance as a way to cut output. Plant maintenance is normally scheduled during the winter seasonal lull in demand.

“The Indian market, by and large, remained resilient, with a marginal five per cent decline in iron ore so far this year. The ongoing crackdown and closure of mines affected overall output across the country, reducing availability of ore for steel mills,” said Amitabh Mudgal, vice-president, marketing and corporate affairs, Monnet Ispat.

Sharply falling prices and swelling inventories have forced some small traders to sell their stocks at a loss, abandoning hopes for a strong rebound in demand for iron ore and steel in the latter half of this year, given the bearish outlook in the global economy.