Monday, June 22, 2009
Michelle Wiese Bockmann - Friday 19 June 2009
CHINA’s iron ore mines face a massive shakeout, with a “severe fall” in domestic production set to boost shipments from Brazil and Australia, according to the United Nations Conference on Trade and Development.
The agency’s annual report on the 2008 iron ore industry forecasts what it called a “great Chinese shakeout” resulting in widespread mine closures and even greater reliance on imported iron ore — a key driver of demand for the bulk carrier freight market.
“It is probable that between one third and one half of Chinese iron ore capacity will close over the next three years, with 40%, or 130-150m tonnes, being the most likely reduction figure,” the report said.
This would “catapult” the world’s top three iron ore miners to record levels of control of the global trade in seaborne iron ore.
Chinese substitution of imported iron ore over its own more expensive and poorer quality product, has emerged as the sole driver of rocketing freight rates in the last two months.
Capesize spot rates on the major trading route from Brazil to China have tripled since mid-April to exceed nearly $117,000 per day because of substitution.
Forecasts that this trend is set to accelerate is of major significance for the global capesize fleet, which now relies almost wholly on Chinese demand to set the market rate.
Brazil’s Vale and Australia’s BHP Billiton and Rio Tinto control 69% of iron ore shipments, which rose 7% to a record 845m tonnes in 2008.
The shakeout was forecast in “the next few years”, Unctad said.
China is currently the world’s largest iron ore producer, at 366m tonnes, or just over 20% of the world’s total production of 1.7bn tonnes.
But Unctad says that small and medium-sized Chinese producers will be “forced to substantially reduce their output, particularly since they are no longer protected by high freight costs for imported iron ore”.
Last month, Rio Tinto said half of domestic mines were already closed.
Unctad says lower freight rates and high costs have meant half of China’s 8,000 mines were operating at a loss, and reliant on government assistance.
Contract prices for iron ore were likely to remain at same level as spot prices of $70 per tonne for landed iron ore in China in the medium term.
“A consequence of this price shift is shakeout of Chinese iron ore mining,” the Unctad report said.
“The effect of the price fall will be reinforced, as far as Chinese mines are concerned by rising costs for health and safety measures, environmental management and rising energy prices.”
Chinese iron ore has average grade of about 27.5%, much lower than imported iron ore at about 60%.
The industry is highly fragmented, with only 49 mines classified as “major” and producing 188.3m tonnes, while “medium and small mines” produce 636m tonnes.