I haven't read up on the full story, but I guess it goes something like this:
Up until about 2000, China could produce enough ore from its mines to feed its mills, so it did. Somewhere between then and 2004, it ran out of local production and its growth came out of the world market, which had been pretty dead, since steel use had been in decline in the west for a long time. All the miners were caught with their pants down and couldn't meet the demand. The price of steel absolutely soared through the stratosphere here. If you wanted some steel from Baosteel, the terms were "you pay us now, we'll deliver when we deliver." I kid you not. I had people chasing me to see if I could find scrap in Australia to export to China.
Now I would say China is not far from peak steel production if it has not reached it. It is exporting steel now.
I take it that their local reserves are not exhausted, they just couldn't keep pace with steel demand that was growing by phenomonal amounts each year. If steel production has indeed peaked, BHP, Rio and Vale are surely going to be left with less and less leverage to dictate the price of ore.
The big players stamping out the juniors here probably wouldn't have much effect. As I understand it, many of the juniors only took off in response to the incredible surge in demand and cannot exist without it longer term. It would be difficult to abuse a monopoly position for gouging when the customer has a much-reduced need for what the monopolist is flogging.
I would be inclined to think the crash is only just beginning, merely delayed by the mining boom propping our economy .
Iron ore prices are crashing, won't be long before they are $70.
I would be selling up in WA before its too late. I've noticed vacancy rates surging and rental asking prices declining on a level not seen beforem With the jobs and money dissapearing now, this is bound to become worse. Investors must be starting to flee the market if they are seeing the obviuos.
sign in TED
Guest
6 Sep 2014, 01:46 PM
Iron ore prices have little to NO impact on house prices, what a laid of shit Mike.
Iron ore prices supported jobs, it created jobs, a shitload, big dollar jobs, for people with little eduction or qualifications. They were able to buy houses they were not otherwise capable of previously, it created other jobs around the mining Industry, cafes, car dealers, boat dealers, furniture and appliance stores etc etc.
These fed the whole housing industry frenzy along with record low rates.
The fact is, what supported and grew house prices is now dissapearing fast.
Deny it all you like Mike.You say iron ore prices had little or no impact on prices and then go on to say other factors are far more important, what are these Mike, remembering that iron ore prices supported jobs both directly and indirectly.
House prices in Perth are virtually unchanged since 2007 - all the big rises in the price of ore did not shift house prices at all. your post is just a made up fantasy.
If rising iron ore prices did not increase house prices how can they now cause them to fall? You guys dont get it at all. House prices stagnated due to the GFC and no amount of good news could shift consumer confidence, now watch Sydney and Perth losing their GST cash cow in WA and their unemployment rising and nothing seems to dent the confidence of buyers.
Jimbo
6 Sep 2014, 02:24 PM
Mining doesn't create that many jobs. Building mines however creates shed loads.
Building many mines rapidly and simultaneously creates high labour demand and inflates pay.
A low ore price just means that we probably won't be rushing to build any new mines in the near future so we will see a fall back in high paid FIFO construction jobs and a reduction in immigration.
These are the things that will hit house prices.
Jimbo you are just not correct here. Take Roy Hill for example -that will employ 2000 permanent workers for 20 years, whereas during construction the workforce is expected to peak at 4000, but it will be less for much of the project.
2000 permanent jobs for 20 years is much better for the long term future of Perth than a few years construction, peaking at 4000 jobs many of these workers are from interstate and from overseas on 457s
Definition of a doom and gloomer from 1993 The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
The iron ore price collapse is starting to claim victims, with one exporter bound for administration and a $250 million takeover deal under increasing doubt.
This year's 38 per cent fall in the benchmark iron ore price continued late on Friday night, with the price slipping to $US83.60 a tonne.
The price for Australia's most lucrative export commodity has been below $US100 a tonne for 15 weeks, and is now close to the break-even level for several small and medium-sized Australian exporters.
The price pressure became too much for pokie king Bruce Mathieson's Western Desert Resources, which was forced to appoint KordaMentha as voluntary administrators on Friday.
Western Desert had been trying to renegotiate funding arrangements with Macquarie for its Roper Bar export operations in the Northern Territory but was told that no support would be forthcoming.
Western Desert named the low iron ore price among the reasons for its failure, which will also hurt engineering group Thiess, which was contracted to work as the company's mining contractor until January 2017.
The collapse comes despite Western Desert having the financial firepower of Mr Mathieson and former Coles and AMP director Rick Allert behind it.
The sliding price could also cause trouble for media mogul Kerry Stokes, whose ASX-listed iron ore vehicle Iron Ore Holdings is subject to a takeover offer from BC Iron.
Under the terms of the acquisition bid, the deal can be terminated if the iron ore price falls below $A90 a tonne for 20 consecutive days during the offer period.
Friday night's fall to $US83.6 a tonne translated to $A89.14 a tonne, and represents the first time the price has gone below the nominated level since the takeover was launched on August 11.
The offer period was initially scheduled to run until September 26, and has since been extended to September 30, meaning there are just over 20 days until the end of the offer period.
BC Iron has the right to extend the offer period further if it chooses.
If the takeover survives the price slide, Mr Stokes will receive about $8.5 million in cash and about $112 million worth of BC Iron shares, which are more valuable and far more liquid than IOH.
Unconfirmed media reports suggest Japanese buyers of aluminium have agreed to a record-high premium of USD420/t, or US19.1c/lb, in the December quarter, up 4% from the September quarter. If confirmed, this would be the fourth consecutive quarter where a record premium contract has been set. Aluminium premiums are paid on top of the LME aluminium price for prompt delivery of the metal.
Nickel prices continued to lift on expectations the Philippines will enact mining laws similar to Indonesia, potentially sidelining the majority of China’s nickel ore and concentrate imports. Gold futures rose on views the US Fed will maintain low interest rates after US employers added fewer jobs than expected in August. Crude oil futures declined on the weaker US employment data but also as a cease fire between Ukraine and pro-Russian separatists eased geopolitical risks. Over the last week, thermal coal fell 3.2% to USD67.5/t (FOB Newcastle), while alumina rose 1.8% to USD331/t (FOB Australia). Iron ore fell by 0.8% on Friday to USD83.60/t (CFR China).
The total number of drill rigs deployed onshore in the US rose from 1,914 to 1,925 last week. Rigs deployed in oil plays advanced from 1,575 to 1,584, below record-highs of 1,589 from a few weeks ago, while rigs deployed in gas plays increased from 338 to 340.
Australia and India have signed an agreement that will allow Australia to export uranium fuel to India, boosting India’s nuclear power sector and the nation’s attempts to address severe power shortages.
The ferrous scrap market in eastern China continued to decrease this week, posting the largest weekly fall since March, due to a weaker steel market as demand was further dented by falling property prices and tight credit.
News of Jiangsu-based mill Xicheng Steel's credit woes also hit market sentiment.
Platts assessed heavy melting scrap thicker than 6 mm in eastern China Yuan 60/mt ($10/mt) lower week on week Friday at Yuan 2,030/mt ($331/mt) including VAT, delivered to Zhangjiagang, Jiangsu province.
Steel mills in eastern China including Shagang, Yonggang and Zenith Steel all cut scrap purchasing prices twice over the week, by a total of Yuan 60/mt, while Magang Group lowered its buying price by a substantial Yuan 100/mt.
One scrap supplier in Anhui province was heard to sell scrap to Shagang at Yuan 2,060/mt, based on its long-term relationship with the mill that allowed it to have a Yuan 30/mt premium not available to other smaller traders.
Other traders were heard to have sold scrap to Shagang at Yuan 2,030/mt, the same as Shagang's latest purchasing price announced on September 2.
Xicheng Iron & Steel, which said Wednesday it was facing liquidity issues and has partially halted production, was heard to have stopped buying scrap for more than two weeks due to tight credit. Due to reduced scrap demand from Xicheng, sources at two other mills in the same province said that they were experiencing an increase in scrap delivered to their mills.
"Besides sluggish steel demand, steel prices lack support because iron ore prices have kept falling," said a source at a major construction steelmaker. "That's why scrap prices are seeing a steady decline."
"We are trying to control the volume of buying below consumption at about 1,300-1,500 tonnes/day," he added.
Fengli Group, China's largest scrap trader, has continued to hold back from buying scrap since mid-August, with mills preferring to use more attractively priced iron ore.
Traders said Friday they were worried about a further drop in scrap prices due to weak demand for steel products and lower iron ore prices.
BHUBANESWAR: The Jharkhand government has ordered closure of a dozen iron ore mines in the state, including those of Tata Steel, SAIL and Orissa Manganese and Minerals, following the Centre's move to amend mineral concession rules of 1960 under which mining leases for major minerals are given out.
A day after issuing the directive, the government served notices to these companies on Thursday, dealing a blow to the steelmakers dependent on raw material from their captive mines in the west Singhbhum region. The closure of mines will also impact companies that buy ore from the market, given the already prevalent shortages in the market.
Tata Steel, for instance, has shut its Nuamundi mines, which met 25-30% of the company's total requirement of raw material and for which it has an environment clearance of 10 mt annually. "Jharkand government will be seeking clarification from the central government. Some other miners are also considering seeking clarification from the Supreme Court," said a senior Tata Steel official, who did not wish to be identified.
SAIL's mines impacted by the order are in Gua, Kiriburu and Budhuburu. As ET had reported on August 27, the state government's move was imminent ever since the central ministry of mines amended the mineral concession rules, following the Supreme Court order in May to limit lease extensions without licence renewals.
The related notification of July 18 changed the rules to allow a grace period of two years only to those companies which applied for renewals for the first time. By clarifying the "deemed provision" under Rule 24(a)(6) could not be extended to mines waiting for second or third renewals, it rendered their operations illegal.
Experts believe the amendment applies to not just iron ore but all other minerals including coal, posing a possible challenge to the Narendra Modi-led NDA government at the Centre which is seeking to spur growth. Speaking to ET earlier, Tata Steel's managing director TV Narendran had said the company was in discussion with the Jharkhand government and was hopeful of a resolution.
"It is not in the interest of stakeholders to stop mining. Nobody wants it to stop," he had said. Rajesh Bansal, a former sustainability head at Federation of Indian Mineral Industries, said miners had suffered not only because of undue delays in renewals, largely at the state level, but also because they were forced to get fresh green clearance at the time of renewals, even for areas that had been mined for decades.
Nickel climbed to a 9-week high of USD9/lb on deficit concerns after the Philippine House’s natural resource committee approved a bill to ban the exports of unprocessed ore. The Philippines accounted for nearly all of China’s nickel ore and concentrate imports in July. Earlier this year, Indonesia enacted a similar mineral ore export ban, sidelining a major source of China’s nickel ore imports. If the Philippines decides to follow through with an export ban, we expect China’s nickel pig iron sector to cut back output significantly due to an absence of nickel ore.
Crude oil benchmarks finished mostly lower on demand concerns after China’s crude oil import growth slowed in August. Gold futures fell as the US dollar strengthened, reducing the appeal of the precious metal as an alternative asset. Iron ore remained unchanged at USD83.60/t (CFR China) as Chinese markets were closed due to a public holiday.
China’s iron ore imports fell 9% m/m to 74.9Mt in August but remain 9% higher y/y. The fall in imports partly reflects a small port inventory destock but is also partly consistent with easing demand. Net imports of coal fell 19% m/m and are now some 28% lower than a year ago. Falling imports of coal are consistent with both modest power output growth and current low prices for both thermal and coking coal. China’s net exports of crude steel fell 4% in August but remained 34% higher y/y. Unwrought copper and aluminium imports fell 12% y/y to 340kt and 38% y/y to 54kt, respectively.
One of the world's largest investors in mining stocks, BlackRock, has been out and about over the past week issuing warnings to the major resource companies. The iron ore price has hit a five-year record low and BlackRock wants to push a message to management - avoid reverting to the high spending expansionary ways and stay focused on cutting costs and rewarding shareholders.
Evy Hambro, whose team manages more than $20 billion across multiple funds for BlackRock, doesn't seem to explicitly mention whether he includes big iron ore producers chasing increased production among the list of management's bad habits - or whether he thinks the likes of BHP and Rio are ultimately shooting themselves in the foot, given that massively increased supply is a significant factor on the weakening price of the metal.
There is plenty of unconfirmed talk that this is the message that BlackRock has conveyed to the likes of BHP Billiton (in which it is the largest shareholder) and Rio Tinto.
One of the larger culprits in a supply-flooding sense is Fortescue which, percentage wise, has grown much faster than its larger competitors. However the genesis of its expansion plans dates back many years and its target production level has now been reached. Fortescue's shareholders are unlikely to see any further volume expansion beyond sweating the existing assets a bit harder.
The ripple effect of the continuing fall of the iron ore price is an issue that is now becoming mainstream. It has major ramifications for the country's exports and governments' tax revenue and thus the broader economy.
To date the large mining companies in Australia have been able to offset last year's lower commodity prices for iron ore and coal by undertaking major cost cutting drives and efficiency initiatives.
But if prices continue to fall and much of the low hanging fruit has been harvested, revenues and profits will be under pressure.
While we can't blame everything on oversupply, given there are seasonal demand factors from the Chinese customers that come into play - the latest of which is that country's weak property market - the fact remains that the Australian producers in particular have been pumping out enormous volumes of iron ore into the seaborn market.
The immediate focus for the Australian iron ore industry has been the health of the smaller mining companies with cash costs close or in excess of the current iron ore prices. How much longer can they last and is this the start of a wave of consolidation?
The seaborne iron ore market edged down Monday after negative steel fundamentals placed raw material procurement on the back-burner.
Platts assessed the 62% Fe IODEX at $83.75/dry mt CFR North China, down $0.25/dmt from Friday.
"I feel any slight rebound would mark some sparks of brightness before the darkness comes," a procurement source for a Hebei-based mill said. "Steel sales are doing really badly now and there's little hope for any improvement through September and October, though these are traditional months for a steel boom."
In September and October, as the weather cools, productivity in the construction and infrastructure development industries usually experiences a seasonal spike.
As these sectors are major consumers of steel, sales typically see a spike during these autumn months.
This negative performance was evidenced by the steel square billet price.
Spot prices of billet in Tangshan, a closely watched indicator of steel fundamentals, lost Yuan 40/mt from Friday to finish at Yuan 2,400/mt ($389/mt) ex stock Tangshan, according to a steelmaker in the region.
A trader in Hong Kong added that "unless the Chinese government decides to step in with subsidies and tax cuts, today's quietness will be tomorrow's noise", referring to the difficult challenges hindering any real improvement to downstream steel performance and iron ore buying appetite.
Another trading source in Hong Kong said the "crux" of the matter was steel prices and that was cascading down to negatively impact iron ore demand. "Real estate hasn't been doing well and steel demand as we can see it, is poor. We also haven't heard of any new policies coming from the Chinese government that could boost economic growth and confidence, so it's all up in the air."
A steelmaker in central China said that market players were all holding back from buying ore as they wanted to see when spot prices would bottom out.
"We need to know clearly when the price bottom will be reached before buying," the steelmaker said.
"But it's so uncertain when that bottoming out will take place. There are really no clear signals now to suggest when that will be, so we'll wait." Australian miner Rio Tinto was offering Pilbara Blend fines at $84.50/dmt CFR Qingdao on a 62%-Fe basis on globalORE, for an 170,000 mt shipment arriving in the first-half of October.
The offer was initially at $85/dmt CFR Qingdao before it was lowered.
The counterbid was at $84/dmt CFR Qingdao. An offer for 62%-Fe Australian Newman fines was also present on globalORE at $84.90/dmt CFR Qingdao, for a 90,000 mt shipment arriving September. The counterbid was at $82/dmt CFR Qingdao.
A 62%-Fe Australian MNP fines cargo was heard to have been offered at $84.50/dmt CFR Qingdao on globalORE, for an 170,000 mt shipment arriving September. The counterbid was at $81.90/dmt CFR Qingdao.
Early in the day, a cargo of Australian Yandi fines was heard to have traded at $73.80/dmt CFR Qingdao on a 58%-Fe LAPS (Low Alumina, Phosphorus, Sulfur) basis on globalORE. The 80,000 mt cargo will arrive October.
Platts assessed the 58% Low Al price at $74.25/dmt CFR North China, down $0.75/dmt from Friday, and falling by a larger extent than the higher grades.
Everyone knew this was going to be a difficult year in the iron ore market.
Expansions by existing producers such as Rio Tinto and BHP Billiton and ramp-ups by newer players in Australia and West Africa were widely expected to generate a wall of supply in the sea-borne market.
The timing was always going to be problematic, given the equally widely expected slowdown in China, the world's biggest buyer of iron ore.
The combination of supply surge and slowing demand growth has already unleashed a battle for survival among iron ore producers. The latest victim of this brutal new iron age is fledgling Australian producer, Western Desert Resources, which has just gone into administration.
But at least Chinese steel production has been growing, even if the rate of growth has braked sharply to 2.7 percent in the first seven months of 2014 from 12.1 percent in the year-earlier period.
However, it is getting harder to ignore the building pressures in the Chinese steel sector and the rising risk of some sort of demand shock along the raw materials chain.
BUILDING PRESSURES
The surest sign of tension in China's massive steel market is the steady decline in domestic prices.
On the Shanghai Futures Exchange (SHFE), the most active steel rebar contract slumped to another record low last week, extending a price decline that has run uninterrupted since the beginning of August.
The SHFE's hot rolled coil (HRC) futures contract has fared no better, also closing the week at its lowest level since it was launched in April this year.
The two Shanghai steel contracts have tracked each other closely since April, but as the graphic below shows, rebar has fared significantly worse.
That's a clue as to what lies behind this accumulating price implosion, since rebar is the form of steel most widely used in construction.
Property sales and new starts have both been falling across China with no end in sight to the downturn.
Local governments have been quietly easing previous restrictions on property purchases and the central government continues to drive investment into affordable housing, but neither is sufficient to offset the profound malaise in China's previously white-hot construction sector.
The fact that HRC prices are also falling, even if not as fast, suggests that steel demand weakness is spreading into the broader manufacturing sector.
That chimes with the latest purchasing managers indices. Both official and unofficial surveys for August painted a worrying picture of deceleration in the engine-room of global manufacturing.
SAFETY VALVE
Given such a dismal backdrop it is surprising that Chinese steel output has been rising at all.
But then this is an industry defined by its ability to survive on the thinnest of profit margins and right now those margins are positive because the prices of steel inputs, namely iron ore and coking coal, have been falling faster than steel product prices.
This naturally leads to something of a vicious pricing circle with Chinese steel mills incentivised to keep iron ore purchases to a bare minimum to prevent any rebound and consequent impact on margins.
Yet by overproducing relative to actual steel demand, they are collectively preventing any recovery in their own product pricing.
The only reason why things aren't even worse is that China's steel producers have an important safety valve in the form of exports.
Flows of steel products out of China have undergone a step-change since the start of this year.
Exports have increased by 35 percent so far this year with net exports jumping by 44 percent. In tonnage terms, China has shipped an extra 14.9 million tonnes so far this year, almost matching output in Italy over the same period.
Looked at positively, this is an indication of strong demand everywhere else, particularly the developed world and most particularly the United States, where industrial activity is going from strength to strength.
But there are limits to how much the rest of the world is prepared to buy from China.
A protectionist reaction is taking an ever more concrete form - witness last week's imposition of preliminary anti-dumping duties on Chinese wire rod and a recently launched investigation by the European Commission into stainless steel dumping by China and Taiwan.
The export safety valve, in other words, does not have limitless capacity.
STEADY AS SHE GOES?
This means that, sooner or later, Chinese steel mills are going to have to adjust their output to match domestic demand.
Well-documented clampdowns on older, polluting steel production capacity in provinces such as Hebei are playing their part. Output in what is China's top steel-producing province and also the frontline in Beijing's "war on pollution" fell by 6 percent in July.
But such is the excess capacity hanging over the sector and such the tenacity to survive, often abetted by local governments, that overproduction and resulting steel price weakness seem hardwired into the system.
That's going to keep the iron ore price under pressure, given mills' understandable desire to maintain what little operating profit they can eke out of the current pricing structure.
The only way Chinese steel prices are going to experience any sustained recovery is if output is collectively curtailed more aggressively. But then that wouldn't exactly be good for the iron ore price either.
The consensus iron ore narrative of lower-cost production smoothly displacing higher-cost production is predicated on a business-as-usual-but-just-a-bit-slower view of Chinese steel demand.
It's a view that is looking ever more shaky the lower Shanghai steel prices fall.
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