Chinese opposition to low-priced iron ore dumping defies logic

The rest of the world might have found it absurd, but China thought it could turn the tables on steel-importing countries in the West by raising complaints that iron ore industry leaders were in cahoots in selling the steel-making ingredient in its market at manipulated low prices. A group of 20 Chinese miners says in an angry statement: "A huge volume of low-priced imported iron ore has had a severe impact on the domestic mining industry."

This is also posing "a big challenge for the security" of the country's steel production. Naming directly Anglo-Australian mining groups Rio Tinto and BHP Billiton and Brazilian Vale for unsettling the Chinese ore market, the group has urged Beijing to initiate an "anti-dumping investigation" into the mineral imported from the big three.

Rio, BHP and Vale are not the ones responsible for deluging the Chinese market. Yes, the Chinese market is deluged with current port inventories being at the highest since December 2014. Local Chinese importers will pile up stocks of imported ore whenever the market works in their favour. Beijing is yet to succeed in trimming their numbers so that discipline could be imparted in the trade.

Chinese complaints about low prices will not stand scrutiny since iron ore is a globally traded commodity where besides Australia and Brazil, at least 40 other countries are engaged in ore production for use by domestic steelmakers and also exports. Combine the output of Rio, BHP and Vale or that of the world's two biggest producers Australia and Brazil - it will be around one billion tonnes (bt) against likely 2016 world ore production of 3.15 bt. The world is in growing surplus of ore and there is no way a miner could manipulate prices the way the Chinese innuendoes suggest.

In Communist-ruled China, a trade issue with global implications will not be raked up by any industry without a nod from Beijing. Isn't the call for anti-dumping investigation into imported ore price a Chinese way of replying to the worldwide campaign against that country's continued steel exports with large dollops of subsidy from official agencies at various levels? From the US to the European Union to India, Chinese steel is encountering various anti-dumping measures.

The year-on-year Chinese steel production in the first half is down 1.1 per cent to 400 million tonnes (mt). But, as the year closes, Chinese production could be at last year's level of 804 mt. After providing for all the stimulus spending and expansion of corporate credit in China, the World Steel Association sees the possibility of steel use in that country falling four per cent this year and again by three per cent in 2017. In the circumstances, Chinese steelmakers will remain under pressure to annually export over 100 mt.

Therefore, the fulminations taking the form of Chinese miners' demand for anti-dumping investigation. A decade ago when China made 356 mt of steel, local miners were supplying half the required ore. The share of domestic ore supplies is now down to 20 per cent, but this is when Chinese steel production exceeds 800 mt. The country has plenty of ore reserves but the mineral's iron content being too low with high impurities, its mining and washing will make economic sense only if its prices stay much above current level.

Economic laws continue to claim victims of high-cost Chinese iron ore mines. Remember, iron ore was traded at as low as $37 a tonne in December. As a result, China's imports last year soared to 952 mt when world iron ore seaborne trade was 1.3 bt. Its ore imports in the first half was 493.7 mt, raising the prospect of China finishing the year with imports of around 1 bt. Viability of steel operations makes high ore imports a compelling consideration for China. The fact remains when the world didn't foresee that Chinese growth was going to slow down, iron ore industry leaders and also upstarts like

Fortescue Metals started investing billions in mines capacity expansion in anticipation of China becoming a 1 bt steel producer at some point. Ore prices remaining at the current level or going down will continue to lead to Chinese mines operating at the upper end of the cost curve out of production. Even then, starting next year, Chinese ore imports growth will start slowing.