By Melissa Pistilli-Exclusive to Iron Investing News
As China’s economic growth began to slow into the third quarter this year, many pointed a finger at factory closures during the Olympics. But now there is little doubt that the spreading global economic crisis is taking a toll on Asia’s largest boom economy. And it’s becoming quite clear to most that an economic downturn in China, the world’s biggest iron ore purchaser, spells hard times for those in the iron ore and steel manufacturing industries.
Reports out yesterday show Chinese third quarter economic growth fell 1.1 per cent from the second quarter and 3 per cent from last year to 9 per cent. As economic growth shrinks in China, a major force in the global market, so does the demand for commodities like iron ore. As demand from automakers and builders slows and China’s chief steel companies cut-back production rates, the spot price for iron ore has plummeted.
“The persistent drop in prices of a variety of steel products has forced many domestic steel manufacturers to cut production to reduce losses,” said Zhang Ping, senior steel industry specialist with Umetals.
The 68 million tonne supply glut sitting in Chinese ports doesn’t help spot prices, either. Recently, Chinese steel makers asked Australian miner, Mount Gibson Iron LTD, to temporarily halt iron ore shipments.
According to a Bloomberg report, cash prices for iron ore imported by China fell 12 per cent to a 19-month low on weakening demand from steel manufacturers. Since the February high of $198/tonne, iron ore spot prices have dropped nearly 50 per cent to $100/tonne recently. In the past few weeks, the iron ore spot market has experienced even more dramatic drops in price, falling as low as $70/tonne.
Further evidence of China’s decline in growth is the marked drop in iron ore exports from India, of which almost 50 per cent is delivered to China. Currently, 30 million tonnes of iron ore meant for Chinese consumption is held up in various Indian ports.
Overall, Indian iron ore exports for September fell nearly 26 per cent to roughly 3 million tonnes. Last year, the nation exported over 100 million tonnes of ore. Ministry of mines officials expect total exports to decline to approximately 80 million tonnes for this year.
Declining iron ore demand in China and worldwide doesn’t bode well for the world’s leading iron ore producers as they enter the 2009 contract negotiations with their major customers next month. As inventories rise and demand falls, industry analysts expect the iron ore trade to become a buyer’s market this time around.
“The question is not whether the contract price will be lowered, but how much it will drop,” said Ma Keming, an analyst with Huatai Securities Co.
Are the world’s major iron ore producers concerned that China’s economic boom may be coming to an end? Or are these latest developments merely a pause in continuing unprecedented growth?
Either way, the downturn in growth and subsequent drop in iron ore prices will undoubtedly lead to output cuts and new project delays. “Most mining companies would be concerned about expanding too rapidly, so we will see a number of companies, possibly including BHP and Rio, revisiting their expansion plans,” said CLSA Asia Pacific analyst Matthew Whittall.
