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One of the recurring themes in iron ore’s precipitous decline this year has been the weak state of Chinese demand. The problem with this is that it simply isn’t true.
It doesn’t take much of a search to find media and analyst reports that reference softness in China’s steel market as one of the major reasons for Asian spot iron ore’s 43-percent decline this year to a five-year low of $75.60 a tonne on Thursday.
“Iron ore falls further as Chinese buying interest stalls” was a Reuters headline from Oct. 17.
Just in case anybody thinks I’m picking on my own colleagues, this one is from competitor Bloomberg on Thursday: “Iron drops to lowest since 2009 as APEC curbs dent demand” – a reference to steel mills closures ahead of the upcoming meeting of the Asia-Pacific Economic Cooperation group in Beijing as part of measures to control pollution.
It’s not just news reports. Analysts have also pointed to the slowing growth of China’s economy.
“In China, slowing industrial trends and deteriorating property fundamentals are having an adverse impact on bulk commodity demand – prices of iron ore and thermal coal both hit five-year lows,” said a recent research report from a major bank.
To be fair to both the media and the analysts, many have also pointed repeatedly to the increase in supply as a factor in driving down iron ore prices.
Focus on China economy misleading
But the fact remains that because China buys two-thirds of seaborne iron ore, the focus has been very much on the outlook for its economy, and in particular the sectors that use the most steel, such as housing construction and infrastructure.
It’s here that many analysts see weakness as the Chinese authorities try to shift the economy to a more consumer-led model and away from the fixed-asset investment and export-orientated manufacturing that have driven the past decades of rapid growth.
While all this may well be accurate, the fact is that China’s economic situation hasn’t negatively impacted on iron ore imports.
If your sole criterion for judging the iron ore market was Chinese imports, you’d have to say it was very strong indeed.
Imports in the first nine months of the year were 699.1 million tonnes, a gain of 16.5 percent on the same period last year.
This increase actually represents an acceleration in the rate of growth from 2013, when imports expanded 10.2 percent for the whole year.
If maintained for the rest of the year, the rate of growth for 2014 would be the strongest since 2009, hardly the sign of a weak market.
Of course, analysts can point to slower growth in steel output, which is up 2.3 percent in the year to end September, and also to high port inventories for iron ore as evidence that all isn’t that rosy with iron ore demand.
While this is true, it still doesn’t explain away the fact that iron ore import demand is having a very strong year in China.
Supply gain is the price driver
Any objective analysis of China and iron ore can only conclude that it’s the additional supply to the market from the mine expansions in the state of Western Australia and elsewhere that have driven the price.
The iron ore market is no longer a demand-driven story, it’s almost entirely about supply, and while there is widespread recognition that this is the case, it seems the rhetoric has yet to change.
The world’s top five iron ore producers, led by the big three of Brazil’s Vale and the Anglo-Australian pair of Rio Tinto and BHP Billiton, are bringing nearly 400 million tonnes of new supply to market within the next three years.
Some of this has already hit, taking the market into supply surplus after several years of deficits.
The major miners have taken a deliberate gamble that they will be able to use their low costs of production to force virtually every tonne other than their own from the seaborne market, and shut down about 40 percent of Chinese domestic output as well.
This is a huge call, but even if they can achieve this, it will come at the expense of ensuring prices remain low for an extended period.
A more common type of market report for iron ore should be headlined something like this: “Iron ore declines as exports from Australia’s Port Hedland rise 6.5 percent in October to near record.”
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- [Editor:sunzhichao]
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