Policies to help sustain iron ore production in China will only prolong a global surplus, according to Fitch Ratings Ltd., which said the government’s move this week to cut miners’ taxes will have limited impact as prices sink.
The benefit for local companies from the cut will be eroded by competition, Fitch said in a statement on Friday. Mining and processing costs in China are higher than overseas because of the country’s low-grade ore, and the impact from the tax reduction for miners will probably be short-lived, it said.
Iron ore fell below $50 a metric ton last week as surging low-cost production from Australia’s BHP Billiton Ltd. and Rio Tinto Group boosted a glut. China’s State Council announced the reduction in resource taxes on locally-mined ore on Wednesday as prices were low. The country is the world’s largest steelmaker, buying ore from overseas to supplement local supplies.
“Any support provided to sustain iron ore production in China will only delay a much-needed correction of the global iron ore oversupply situation,” the agency said. “Fitch expects China’s steel demand to peak within the decade.”
Ore with 62 percent content at Qingdao fell 1.7 percent to $47.53 a dry ton on Friday, according to Metal Bulletin Ltd. Prices fell to $47.08 on April 2, the lowest since 2005, based on daily and weekly data from Metal Bulletin and annual benchmarks for ore delivered to China compiled by Clarkson Plc. The raw material fell 33 percent this year.
China will cut the resource tax 60 percent from May 1 to improve miners’ operating environment, according to a State Council meeting statement. Separately, a subsidy program for miners may be introduced as soon as the middle of this month, the official Shanghai Securities News reported on Wednesday.
The tax reduction may pare costs by about $1.70 to $4 a ton, according to Citigroup Inc. As most of China’s remaining iron ore supply is concentrated among state-owned steel mills, the majority of production cuts that are needed will have to come from seaborne producers, the bank said on Thursday.
Atlas Iron Ltd. said on Friday it will halt output from its mines in response to the price slump. The fourth-largest producer in Australia suspended its shares from trading in Sydney on Tuesday, saying it was reviewing operations. Atlas shipped 6.9 million tons in the six months to December.
Seaborne supply will exceed demand by 55 million tons this year, rising to 184 million tons in 2018, according to Morgan Stanley. The global glut will probably widen to 260 million tons by 2018 as low-cost supplies expand, Goldman Sachs Group Inc. estimated in a report in January.