Chinese miners in distress as low iron ore prices threaten to cripple industry

936
Image credit: flickr User: selwa73

China could close up to 80 million tonnes of domestic mine production which equates to about a fifth of its total annual output, consultancy Wood Mackenzie told Reuters last week.

Image credit: flickr User:  selwa73
Image credit: flickr User:
selwa73

It said Chinese mines’ ability to withstand sustained pall in prices for the steel-making ingredient has diminished since fixed annual pricing was scrapped five years ago for short-term indexing.

Analysts have said that China’s heavily fragmented industry has caused some of China’s iron ore mines, especially those in coastal areas, to face some of the highest costs in the country – well above the price of imported ore.

Wood Mackenzie analyst Andrew Hodge said the potential closures of Chinese mines would likely benefit Rio Tinto, BHP Billiton and Fortescue, which operate at the Australian Pilbara iron ore belt on much higher profit margins.

According to him, approximately 40–50 million tonnes of higher cost Chinese mine production — mostly in coastal areas where iron ore is typically of lower quality — was already earmarked for closure.

Adertisement

“The bulk of private production in the coastal region will be in distress at current levels,” Hodge told during a media briefing, putting China’s total domestic production at around 350 million tonnes a year.

Iron ore prices have dropped to a 21-month low of $91.50 a tonne late last week, and Mr Hodge said there had already been some mine closures, with much more to follow.

In 2009, when iron ore prices plummeted as low as $60 a tonne, China saw “huge closures” in the domestic sector as local companies were unable to operate at a profit.

Rio Tinto breaks even at around $43 a tonne, BHP Billiton at $45 a tonne, while Fortescue Metals Group, whose costs are greater due to its lower grade ore, said it would spend $275 million on building four iron ore vessels to help reduce reliance on outside shippers.