Iron ore price tracks higher as Chinese finance deals unravel

According to data from the The Steel Index, the import price of 62% iron ore fines at China’s Tianjin port added $1.50 to $117.20 per tonne amid a general improvement in sentiment among producers.

Last week Vale CEO Murilo Ferreira told the Melbourne Mining Club, the iron ore price enjoys a strong floor around $110 per tonne echoing the words of world number two and three miners Rio Tinto and BHP Billiton:

“It’s very clear for us that we have in average a floor in the range of $US110 per tonne … I believe the next one to two years will see this range,” he said.

“In the last five years we have not seen a quarter of a price that is below $US110 including in 2012 when in September the price was $US87.”

Iron ore remains down just under 13% since the start of the year as China’s steel sector – which consumes more than two-thirds of the seaborne iron ore trade and forges almost as much steel as the rest of the world combined – adjust to slower growth in the world’s second largest economy.

The Chinese market for iron ore has also been distorted by the use of stockpiles – sitting at record levels of some 108 million tonnes after growing 40% year-over-year – as collateral for loans and trade credit.

March’s dramatic 8% fall in a single day was blamed on panicked borrowers, forced by their bankers to repay loans, dumping ore onto the spot market.

About 40% of stockpiles at China’s ports are part of finance deals according to some estimates, but this trade is now unraveling.

China’s currency, the renminbi or yuan, has declined 2.5% in value this year.

The depreciation engineered by the country’s central bank, has not only raised tensions with the US, but increased the pain for steelmakers.

Businessweek reports most of the ore deals are priced in dollars and usually bought using letters of credit, which means “any decline in the yuan causes losses at the time of repayment:”

“While some steelmakers have been using iron ore financing deals to improve their working capital as they need the raw material for production anyway, the biggest problem still lies in their operations. That’s big supply and shrinking demand.” [says Roger Yuan, a Hong Kong-based commodity analyst at Goldman Sachs]

Expectations have been for a sharper slowdown in steel production as Chinese authorities clamp down on pollution in the industry by forcing closure of small steel mills.

Beijing has committed to eliminating 80 million tonnes per year of steel capacity nationwide by 2017, but it should affect mostly domestic iron ore miners which struggle with low quality ore and high costs.

China’s steelmakers have been substituting domestic supply with so-called “lump” ore from Australian, South African and South American producers that lower costs and cut pollution by reducing the need for sintering.

Anglo American charges a premium for its South African 66% Fe lump ore

The big three enjoy marginal costs of as low as $45–$55 a tonne and have massive expansion programs under way.

BHP said its on track to up production at its newest mine Jimblebar to 55 million towards its longer term target of 270 million tonnes per annum.

Rio Tinto is most aggressive – it is ahead of schedule to reach 290 million tonnes per annum and further out 360 million tonnes per annum is the forecast.

Vale has been struggling to keep up with the Pilbara producers, but Ferreira told the same conference the company plans to lift exports from the current 311 million tonnes per year to 450 million tonnes by 2018.

At the same time the Brazilian giant wants to close the gap with Australian producers which enjoy cheaper shipping to China, and reduce its costs by $18 a tonne free on board.

Image by Tom Rodgers