Chinese puzzle: ore is it?

CHINA HAS a range of iron ore mining operations along the traditional mining cost curve.
Some are cheap, some not so cheap and some are very expensive. So expensive in fact that it is only viable when the price of imports is at the full amount negotiated last year. But it seems a long time ago that the price paid for iron ore came anywhere near the dizzy heights of the middle of 2008.
The GFC and all its associated knock-on effects to steel demand has seen to that.
This expensive domestically-produced ore is low grade magnetite and some of it is mined underground rather than the open-cut mines we are used to seeing in the Pilbara.
China’s domestic production of iron ore last year was around the 780m tonne mark and the cost curve shows that about a third of this production is at the high end.
With the recent fall in iron ore spot prices and the extensive discounting being offered by the major producers, this high-cost Chinese ore is no longer viable compared with the price of today’s iron ore imports.
The current low-cost freight market compared with twelve months ago has also prevented dry bulk freight, and hence the delivered price, from adversely affecting this cost differential held by imports.
So something had to give and domestic Chinese production was the obvious victim.
With imported Australian and Brazilian ore now offering significant cost savings to Chinese steel mills, themselves struggling to make a profit at today’s low steel prices, then it did not take long for the Chinese to take the advantage offered by imports.
Of the total 780m tonnes (mt) of Chinese domestically producer ore, about 250mt is vulnerable to replacement by imports.
But as the average Fe content of domestic Chinese ore is 30% compared with around 62%-63% Fe content of imported ore, then the vulnerable ore production equates to about 120m tonnes of additional imports equal to about 10m tonnes a month.
This is all additional demand to the dry bulk shipping market and virtually all this additional demand will be for the capesize sector.
And there is the explanation for the cape freight market increasing 280% since the beginning of this year for an Australia to China round voyage.
No other market fell so dramatically last year and no other has recovered to quite those levels.
Record volumes of iron ore imports were recorded into China in February, March and April yet the total stockpile at the ports has only increased by about 8 million tonnes suggesting the iron ore is being consumed. Yet steel prices have not collapsed, indicating only a moderate rise in steel production, which in turn suggests that total iron ore consumption has remained relatively static.
This is all good news for Australian producers.
According to Braemar Seascope’s Research department based in Perth, total iron ore consumption is expected to fall this year recovering slowly thereafter.
But the outlook for imports is much more encouraging – so long as the delivered price remains competitive.

Peter Malpas is director of group research at Braemar Seascope.