uploads///Chinese domestic iron roe

Can China’s Slowing Domestic Iron Ore Output Aid Iron Ore Miners?


Oct. 12 2015, Updated 9:08 a.m. ET

High-cost domestic production

China’s (FXI) iron ore is of lower quality, containing iron ore content of ~20%–30%, compared with more than 57% for the global iron ore majors. This is the major reason most of the domestic Chinese capacity is in the fourth quartile of the global iron ore cost curve.

Global majors such as BHP Billiton (BHP), Vale SA (VALE), and Rio Tinto (RIO) also have the benefit of better technology, economies of scale, and depreciating local currencies compared to the Chinese domestic iron ore producers. BHP and RIO form 7.2% of the SPDR S&P Global Natural Resources ETF’s (GNR) holdings.

Article continues below advertisement

Domestic capacity going offline

In response to lower seaborne iron ore prices, the high-cost, low-grade domestic capacity has exited the market. Although there is no official data available for the domestic production exiting the market, many industry experts pin the number near 100 million–120 million tons of annualized capacity shut down in the last 18 months.

According to the China Iron and Steel Association (or CISA), China now imports 80% of its iron ore needs compared to 70% just two years ago. In 2014, China imported roughly 78.5% of its iron ore needs, amounting to 933 million tons. This implies the rest, or ~250 million tons, were contributed by local iron ore production. This is significantly lower than ~350 million tons of grade-adjusted domestic iron ore contributing to China’s iron ore needs in 2013. A significant number of domestic mines have shuttered capacity year-to-date.

Sticky supply

According to Shanghai Metals Market (or SMM), an increasing number of mines are shutting down operations in China due to the recent price plunge. According to SMM estimates, the output of state-owned enterprises (or SOEs) should be only 136 million tons in 2015 compared to 149 million tons in 2014. Production by state-owned enterprises tends to be inelastic, as their main aim is to provide employment.

According to RIO estimates, there is still a risk for ~20 million tons of Chinese domestic iron ore capacity at current prices. The remaining domestic iron ore production is either controlled by SOEs or is in geographically advantageous locations, near steel mills and far from ports. So, the reduction in domestic capacity from here would be difficult and slow. By some estimates, including that of BHP, “sticky” supply in China should be close to 200 million tons.

As we discussed in the previous article, although Chinese demand for iron ore could decline by 23 million tons in 2015, the domestic ore availability has also declined by ~45 million tons year-to-date, by RIO estimates. This would imply a marginal growth in imported iron ore of 12 million tons.


More From Market Realist

  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.