Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

You’re concerned about the slowdown in China’s economy. It bothers you that industrial output has plunged to the weakest levels since 2008. You're unsettled that the China Iron & Steel Association "can't see any bright spots" for the metal that's driven the country's urbanization. You’re perturbed Jim Chanos thinks the world's second-biggest economy is heading the same way as Japan in the 1990s

Any Old Iron
A third-quarter recovery in Chinese iron ore prices has petered out
Source: Metal Bulletin

Stop fretting: Rio Tinto, the world's second-biggest iron ore miner, says China's going to be O.K. The world should stop focusing on daily price gyrations for the steelmaking metal and concentrate on the long-term trend, Chief Executive Officer Sam Walsh told Bloomberg's Jesse Riseborough and Ryan Chilcote over the weekend. The company's analysts have been "very, very careful" in their forecasts that iron ore demand will reach 3 billion tons by 2030, up about 36 percent from last year, Megan Clark, a non-executive director at the miner, told a Bloomberg Summit in Sydney today.

That’s good news, right? Not so fast.

The Anglo-Australian miner has good reason to err on the side of optimism. Like peers Vale and BHP Billiton, it has some of the world’s cheapest iron ore mines, and the least to lose from oversupply hitting the market.

The big three miners are engaged in the same game with higher-cost competitors as the one Saudi Arabia is playing against the U.S. shale industry: Let’s flood the market, and see who’s left standing.

Like Ali al-Naimi, the Saudi minister who said in June that Chinese oil demand was growing, Walsh and Clark are glass-half-full sorts of people. But their optimism stands in contrast to the industry’s own assessment.

China's steel sector needs to go through a "painful restructuring" and output will collapse by 20 percent, Baosteel Chairman Xu Lejiang said last month. Demand is evaporating at "unprecedented speed" and oversupply is worsening, the deputy head of the China Iron & Steel Association said a week later. Steel demand in China fell in 2014 and will slip again in 2015 and 2016, the World Steel Association said in April.

The Next Shoe to Drop
China's steel production is slumping, but iron ore imports haven't kept track
Sources: China National Bureau of Statistics, Customs General Administration

Even the flood of exports driven by lackluster domestic demand is shrinking as mills in other countries push governments to impose import charges and start trade disputes. The U.S. is levying tariffs of as much as 236 percent on some varieties of Chinese steel. A price index for the rebar used in making reinforced concrete for buildings dropped below 2,100 yuan a metric ton Monday for the first time since at least 2003:

Steel Yourself
Prices for Chinese rebar just fell to a record low
Source: Antaike

For a reality check, see what the higher-cost producers have to say. Rio Tinto and BHP are in an "imaginary world" and more production needs to be halted, according to Lourenco Goncalves, the chief executive officer of U.S.-headquartered Cliffs Natural Resources. Steel demand in China has "plateaued", Nev Power, his counterpart at the world's fourth-largest producer Fortescue Metals, said last month. 

Commodity gluts do eventually correct themselves as the least profitable producers quit the market and bring supply back in line with demand. But there's little sign of that happening right now. After a modest recovery during the third quarter, an index of Chinese iron ore prices compiled by Metal Bulletin has slipped, and on Tuesday was just 99 cents above July's record-low $44.59 a metric ton.

Companies don't really like competition as much as executives like to preach. As any reader of credit ratings reports would know, an oligarchic market where the big players agree to carve things up for their mutual benefit is a friendly one to investors. In a sense it's admirable that the lowest-cost iron ore producers are ignoring this and taking a more purist stance with regard to supply and demand. But they can't have missed the way this position helps to knock out competition from higher-cost rivals and deliver them yet more market share.

When Rio Tinto says it sees continuing steel demand out of China, it's really saying it sees reason to keep supply pumping for the sake of its long-term strategic advantage. Until the big guys stop playing that game, this market will be no place for shareholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects story to remove chart with erroneous iron-ore production data.)

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net