Iron ore slump set to shrink China's mining capacity

More mine closures in China would increase its appetite for imported iron ore, help prices

A slide in iron ore prices is turning the screw on China's fragmented mining sector, paving the way for closures and consolidation with three-quarters of the country's mining capacity operating at a loss, industry officials said on Friday.

More mine closures in China, the biggest consumer of the steelmaking commodity, would increase its appetite for imported iron ore and help ease a global glut that has slashed prices by more than half in the past 12 months.

"I would like to thank the big four miners for driving prices down because it has given bigger domestic mines an opportunity and forced small miners to cut production," Gao Yan, deputy general manager at the mining unit of Chinese steelmaker Angang Group, told an industry conference.

Top global producers Vale, Rio Tinto and BHP Billiton have boosted output despite falling prices, prompting No 4 iron ore miner Fortescue Metals Group to propose limiting production.

The commodity fell to $54.20 a tonne this week, the lowest since records began in 2008, and Citigroup predicted prices will drop below $50.

Three-quarters of China's domestic iron ore capacity is incurring losses and capacity utilisation rates at small iron ore mines dropped to as low as 20% at the end of last year, said Yang Jiasheng, chairman of the Metallurgical Mines Association of China (MMAC).

"If there are some small loss-making iron ore producers that are forced to close then this will be a good thing for the market," he said, adding that bigger producers would also have to restructure and cut costs.

Only about 3% of China's 4,037 iron ore mines are large scale, with the rest mostly small, said Yang.

Rio Tinto expects some 85 million tonne of iron ore capacity to exit the global market in 2015 on top of an estimated 125 million tonne last year due to tumbling prices, with Chinese mines absorbing most of the losses.

'INEVITABLE TREND'

"The elimination of high-cost miners is an inevitable trend," said Feng Guoqing, general manager at Shougang Mining.

"The oversupplied market will make the decision to close them."

In Hebei, China's top steel producing province, 80% of local mining companies have stopped producing and output is likely to fall 40% this year, said Li Fenghai, vice director of Hebei Metallurgical Mining Industry Association.

But MMAC's Yang said the state needed to recognise the strategic importance of iron ore and ensure there was enough support to maintain a certain level of self-sufficiency.

China's industry ministry has agreed in principle to reduce the tax burden on domestic miners, currently at about 25%, said Yang. That compares to an 8% tax for Australian iron ore miners.

China is the world's biggest iron ore producer in terms of raw ore, but buys about two-thirds of global output because of the low quality of its own ore.

The country's iron ore imports climbed 14% to a record 932.7 million tonne last year as a price slump boosted appetite for high-quality ore overseas.

In contrast, apparent consumption of China's domestic iron ore fell to 205.86 million tonnes last year from 313.8 million tonne in 2013, despite an increase in overall production volumes, data from consultancy Custeel showed.