Iron ore mines in China 'facing annihilation' as majors expand

[SINGAPORE] Iron ore production in China is poised to shrink further as cheaper imports and faltering demand threaten to close mines supplying mills in the top steelmaker.

Most private mines in China have costs that are too high and produce ore of too low a quality to survive, according to Sanford C. Bernstein & Co. Output that fell 20 per cent to 311 million metric tons in 2014, will drop to 271 million tons this year and shrink further in 2016, Goldman Sachs Group Inc said.

Iron ore retreated 39 per cent over the past 12 months as Australia's Rio Tinto Group and BHP Billiton Ltd, and Brazil's Vale SA boosted low-cost production to cut costs and protect market share, spurring a glut as China slowed. The outlook for supply, and consequences for miners in China, will be in focus on Thursday as executives from the biggest producers address a conference in Singapore. BHP Chief Executive Officer Andrew Mackenzie warned on Tuesday that lower prices are here to stay.

"Mines not part of larger cash or credit line-rich steel groups are facing annihilation," Georgi Slavov, head of basic resources research at Marex Spectron Group, said in an e-mail. "Utilisation in China keeps dropping, which means more and more mines are struggling to meet the ends and produce."

While prices rebounded 34 per cent since bottoming at a decade-low $47.08 a dry ton April 2, they are 67 per cent below a 2011 record. Ore with 62 per cent content at Qingdao was at $62.88 a dry ton on Tuesday, according to Metal Bulletin Ltd.

Slowest Pace China grew at the slowest pace in the first quarter since 2009 as policy makers shift the economy toward consumption, curbing iron ore demand. The country, which produces half of the world's steel, supplements local supplies of ore with output from overseas. About three-quarters of existing iron ore capacity in China is not profitable, and demand in the country is evaporating, according to Slavov.

"The growth in demand for iron ore is happening at a slower rate than the addition of low-cost supply, BHP's Mackenzie said on Tuesday. ''Which is why we're bearish about iron-ore prices in the medium-to-long term." BHP wants to cut its costs in the Pilbara to US$16 a ton.

While state-owned miners and suppliers affiliated with mills will keep producing even as prices drop, others will cut output, helping to lift imports, Wang Liqun, vice chairman of China Iron & Steel Association, said in Shanghai last month. Mr Wang will also address the conference on Thursday.

To help sustain production, China said last month it will cut a resources tax for local miners by 60 per cent. While the policies help at the margin, the impact is modest relative to the price drop over the past 12 months, according to Goldman.

"For the majority of private mines it is simply not enough to make much of a difference," said Paul Gait, an analyst at Bernstein in London. Their high costs and low-grade product mean they "have no real economic role to play in the long term."

Among smaller producers affected is Yue Da Mining Holdings Ltd. The Hong Kong-listed company, whose shares rallied this year amid a stock surge in Chinese equities, said last month it's suspending operations at its iron ore unit because it was unlikely to return to profit in the near future. It mined about 42,000 tons of concentrate in 2014, its annual report said.

Surging low-cost supplies will extend a global surplus for at least three years even as some higher-cost mines close, according to UBS Group AG, which sees prices at US$50 this year. Seaborne output will exceed demand by 45 million tons this year and 215 million tons in 2018, UBS said in a May 4 report.

"Prices need to be slightly below US$50 this year in order to balance the market via mine closures," Goldman analyst Christian Lelong said by e-mail responding to questions. "Low prices have taken a heavy toll on Chinese iron ore mines."

More than 160 million tons may exit the market this year as lower prices force high-cost miners to idle capacity, Rio's Chief Executive Officer Sam Walsh told reporters in Perth on May 7. The world's second-biggest producer plans to boost capacity in the Pilbara region to 360 million tons a year.

While BHP has said will miss a target of raising output to 290 million tons a year by mid-2017 as it deferred port works in Australia, the company increased its fiscal 2015 forecast to 230 million tons from 225 million. Brazil's Vale is pressing on with an expansion of cheaper output after signaling that as much as 30 million tons of its higher-cost supply may be reduced.

"No producer has actually announced a production cut," said Tom Price, an analyst at Morgan Stanley in London, referring to the biggest suppliers. "Making public statements is one way a company can signal to the market its intention to change its rate of supply growth."

BLOOMBERG