China’s iron ore imports increased in 2014
In the past nine years, Chinese crude steel production and iron ore imports have evolved significantly. During the first half of 2014, Chinese iron ore imports increased by 19%, mainly due to strong steel production growth and increased domestic to imported iron ore substitution. Star Bulk Carriers Corporation (SBLK) believes this trend will continue in the next years.
Low-quality Chinese domestic iron ore
Due to its low ferrous content, Chinese domestic iron ore is of very low quality compared to international commercial mining standards. A large part of Chinese iron ore production is noncompetitive with high-cost break-even. Chinese iron ore costs more than $100 per ton due to a small production scale, the low quality of iron ore reserves, and the long distance of its production sites from Chinese steel mills.
On the other hand, major international iron ore exporters, particularly Vale (VALE), Rio Tinto (RIO), BHP Billiton (BHP), and Potash Corporation (POT), enjoy low break-even price levels due to large-scale operations and the high quality of iron ore reserves.Furthermore, substantial additional mining capacity of a minimum of 400 million metric tons per annum is expected to come on line until 2016, mainly by these companies. Vale alone has lined up an investment of 19 million metric tons per annum for additional iron ore mining capacity to come on line in early 2016.
Overall, this suggests that the international iron ore market will see substantial additional supply coming in from producers that have the ability of predatory pricing in order to capture more international market share. This is expected to drive international iron ore prices to lower levels with the majority of small private Chinese producers not competitive.
Thus, Star Bulk (SBLK) believes that the substitution of expensive Chinese iron ore production with imported iron ore can provide a significant support to iron ore trade, even with zero steel production growth.This will also benefit other company peers like Diana Shipping Inc. (DSX), Knightsbridge Shipping Ltd (VLCCF), Navios Maritime Holdings (NM), Eagle Bulk Shipping Inc. (EGLE), and the Guggenheim Shipping exchange-traded fund (or ETF) (SEA) index.