Steel, iron ore prices likely to soften as demand destruction in China takes hold

The steel and iron ore markets were bracing for “volatility on a declining trend”, said Yin Jimei, an analyst at Iron & Steel Information Website in Tangshan.

Xu Xiangchun, at Mysteel in Shanghai, said market anxieties over the global economy have coincided with softening domestic demand including a decline in railway construction due to a series of scandals in the Ministry of Railways.

Housing construction has also declined in China due to government efforts to tighten credit to control inflation and to put a damper on rampant real estate speculation.

Prices of both steel and iron ore are expected to soften after China’s current Golden Week holidays, predicts analyst Xu.

The negative predictions appear to fly in the face of statements made by the three biggest iron ore miners — Rio Tinto, Vale SA and BHP Billiton — who said at a recent conference they see no weakness in demand from China.

MINING.com reported the Big 3 saying that forecasts for China’s imports by 2015 now top 1 billion tonnes – up more than 60% from 2010 – due to the relatively high cost and the low quality of its domestic supplies.

Garnaut points out that Australian iron ore miners could be spared from Chinese demand destruction if India, the number two iron ore producer, curtails exports as expected.

Indeed, Business Standard reports today that the Indian Steel Ministry is recommending to increase the export duty on iron ore to 30%.

Steel mills in India have suffered severe iron ore shortages due to a ban on iron ore exports, which was imposed by the government as a way to prevent environmental destruction and to preserve domestic supply for local steelmakers.