Iron ore price faces big China bail out test

On Monday the benchmark 62% Fe import price including freight and insurance at the Chinese port of Tianjin slid for the sixth straight day to $52.50 a tonne, the lowest since July 28 according to data provided by The SteelIndex.

According to data released by the National Bureau of Statistics over the weekend China’s GDP growth slowed to 6.9% in the third quarter of this year, from 7% for the first half of the year.

China is responsible for more than two-thirds of the world’s iron ore consumption and forges almost as much steel as the rest of the world combined and data released by NBS at the same time show a sector in a deepening decline.

Crude steel output in the country continued to shrink in September, down 3% to 66m tonnes, as mills struggle to remain profitable amid a saturated domestic market. Year to crude steel output totalled 609m tonnes, a 2% decline.


The World Steel Organization, last week forecast that steel demand in China is expected to decrease by -3.5% in 2015 and -2.0% in 2016, after hitting a demand peak in 2013.  Global steel demand will shrink 1.7% to 1.5 billion tonnes this year before expanding modestly in 2016 according to the industry body.

The Chinese steel industry faces a big test this week with Sinosteel, one of the biggest importers of iron ore in the country, on the brink of defaulting on its bonds.

Sinosteel is primarily a trading company, but also operates steel mills and owns chrome operations in South Africa and iron ore projects in West Africa and Australia. The company has been kept afloat only because it is one of only 113 elite state-owned firms centrally managed by Beijing.

Investors are eager to find out if the company will be bailed out again on Tuesday when $315m in interest payments become due or whether the communist government will make good on promises to let market forces determine the future of sectors, most notably steelmaking, which have been characterized by overproduction and unprofitability for years.

Rio Tinto (LON:RIO) and  Sinosteel inked a deal in November last year to extend a long-term iron ore joint venture in Australia’s Pilbara region, which had delivered about 250m tonnes of iron ore under an offtake agreement.

At the time of the signing Rio’s chief executive Sam Walsh said the operation had become one of Beijing’s longest running and most successful partnerships with Canberra and “a model” for economic cooperation between the two countries.

Image by chinaposters.net on Flickr