Mining reported that benchmark 62% spot iron ore entered China's golden week holiday at USD 104.20 a tonne recovering from the worst quarterly performance in history and a three and a half year low of USD 86.70.
Iron ore first crossed USD 120 at the start of 2010 and apart from a week in July of that year and all of two trading days in October 2011, the commodity never dipped below that level until July 25th 2012. There were dips and recoveries over that time iron ore hit an all time record in February last year of over USD 190 and famously 8 months later suffered a USD 60 drop over the space of 28 days.
Thanks to China's dominance of the market USD 120 provided a strong price floor for traders and became a rule of thumb in the industry, but 10 weeks below this level and the conventional wisdom is being sorely tested.
Chinese mills almost forge more steel than the rest of the world combined and given the appalling profitability of the country's steel industry you'd think the lower the price, the better for China.
Not necessarily, argues FT.com (sub required). Whatever the new floor turns out to be and it seems more and more unlikely that it will be as robust as USD 120 China has an interest in seeing that it does not go too low.
Raw Materials Group noted China still sucks in the stuff, albeit more slowly. And it is happy with the rate: a low price is not in its short term interests. That is because, as well as being the world’s biggest consumer, China is also a producer. Its myriad small miners, which already contend with low grade deposits are less efficient than global peers. Spot prices of USD 90 per tonne to USD 100 per tonne in 2008 had half of China’s iron ore industry running at a loss. Their cost today is between USD 80 per tonne to USD 170per tonne.
RMG estimates, for comparison, it costs BHP and Rio between USD 40 per tonne to USD 50 per tonne to land ore in China. Chinese ore output could fall from last year’s 320 million tonnes to 120 million to 200 million in 2020.
According to research by investment bank Standard Chartered, neither is the outlook for China's mines getting any better. The iron content of domestic ore currently stands at only 20%, down significantly from 30% in 2004 and on its way to 15%.
Meanwhile, the outlook for iron ore has certainly become more clouded since July, but some of the more bearish analysts may be overshooting on the downside particularly those that see USD 50 a tonne by mid 2013.
Source - mining.com
(www.steelguru.com)
