uploads///Chinese domestic iron roe

Does Chinese Domestic Iron Ore Capacity Have More Downside?

By

Jan. 20 2016, Updated 11:59 p.m. ET

Domestic iron ore capacity

As the supply and demand imbalance is the factor to blame for the current woes of the iron ore industry, any significant exits from the market would be a welcome move for the iron ore miners. In this context, it is important to look at the domestic Chinese iron ore supply.

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.

Article continues below advertisement

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.

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.

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.

Although lower prices would put pressure on marginal mines to close down, for China’s majority of the remaining capacity, the process could be a very slow one.

Advertisement

More From Market Realist

  • Open sign on a sidewalk
    Macroeconomic Analysis
    Top Reopening Stocks to Play the Shifting Market Sentiment
  • Morgan Stanley sign and stock numbers
    Macroeconomic Analysis
    Morgan Stanley's Buyback Stock Picks in 2021
  • Black Wall Street sign is sign of ethical investing
    Macroeconomic Analysis
    Ethical Investing Stocks and Funds for Your 2021 Portfolio
  • New York City skyline and Goldman Sachs logo
    Macroeconomic Analysis
    Goldman Sachs: Options Trade Picks to Play Earnings Season Volatility
  • 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.