China August Iron Ore Estimated to Drop 10% as Prices Fall

China’s iron ore output probably fell about 10 percent this month as tumbling prices squeezed out costly producers and steelmakers used cheaper imports, the China Metallurgical Mining Enterprise Association said.

Production will be about 115 million metric tons this month, little changed from July, Lei Pingxi, executive vice chairman of the association, said today in an interview in Suzhou at a Umetal conference. Output was 127.5 million tons in August last year, according to the National Bureau of Statistics.

The nation’s iron ore output had the steepest decline in July in four years, as the world’s largest metals consumer increased purchases from producers such as Brazil’s Vale SA (VALE3) and Rio Tinto Group. Prices tumbled 35 percent this year to $90.30 a dry ton yesterday, the lowest level since November 2009, according to a gauge compiled by The Steel Index Ltd.

“The competitiveness of Chinese iron ore mines is falling because of falling prices, higher construction costs and taxes,” Lei said. About 42 percent of China’s iron ore mines have production costs of greater than $100 a ton, he said.

China’s iron ore output in the three months to the end of August is about 5 percent lower than the previous three months, Lei said. The capacity use ratio at Chinese miners was 62 percent, according to researcher Umetal.com.

Supply, Demand

Global seaborne iron ore supply may rise 50 million tons in the second half this year from the first half, while demand may decline, Zhang Dianbo, the general manager of raw-material purchasing at China’s second-largest steelmaker Baosteel Group Corp., said at the conference.

Chinese steelmakers, overwhelmed by increasing capacity and sluggish demand, have struggled to remain profitable as steel prices dropped to an almost three-year low this month. Domestic mills had a combined loss of 1.9 billion yuan ($299 million) in July, with an average profit margin of just 0.03 percent in the seven months to July, Wang Xiaoqi, vice chairman of China Iron and Steel Association, said today.

Still, Chinese mills haven’t made significant production cuts, Umetal analyst Zhang Jiabin said. The steelmakers’ operating rate at Tangshan in Hebei province, China’s biggest region by output, is 91 percent, up from 78 percent in October, he said.

China’s ore contains about 20 percent iron, compared with more than 55 percent in Australian ore, making it more expensive to extract, Deutsche Bank AG estimates. China has about 1,500 iron ore producers nationwide, with 1,000 smaller mines accounting for about a third of output, Lei said.

Floor Price

Iron ore prices are well below recognized floor prices of $120 a ton, suggesting high-cost iron ore supply closures will not be far off, Australia & New Zealand Banking Group Ltd. (ANZ) said Aug. 28.

The recent plunge in prices prompted contract ore buyers to seek other ways to price the steelmaking raw material. The current pricing method, based on indexes, doesn’t reflect the needs of larger buyers and needs improvement, Baosteel’s Zhang said. The Shanghai-based company buys ore on a quarterly basis.

As much as 10 percent of globally traded ore is sold through public auctions, while the remaining 90 percent is bought at index prices that are determined by bids, he said.

Australia and Brazil accounted for 66.2 percent of China’s total ore imports in the first half, up from 64 percent last year as imports from India dwindled, Umetal said.

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net

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