China: Steel Output And Iron Ore Imports Weaken

Chinese crude steel output has fallen nearly 10% since last May as the slowdown in Australia's most important export partner continues.

Figures released yesterday show that the country produced 54.7 million tonnes, down 3.6% from September's figure of 56.7 million tonnes and the all time monthly high of 60.245 million tonnes last May.

That was up 9.7% from October of last year.

In the first 10 months of this year, crude steel production rose 11.1% to 580.79 million tonnes, against a 13.5% rise in the nine months to September compared with the same period in 2010.

Import data showed that Chinese imports of iron ore fell to 49.9 million tonnes last month, the lowest level for 8 months and down from the record 60.57 million tonnes in September.

The slowdown is part of a global trend that has already seen ratings group cut the credit standing of majors like Posco of South Korea and UK Steel in the US, because of the worsening outlook.

Posco also reported a 26% drop in operating profit and has already cut production three times in recent months.

The downturn in demand from Europe is noticeable, but it's showing up in the US and India as well.

Reflecting the uncertainty ahead, ArcelorMittal, the world's biggest steelmaker, is cutting production for the current 4th quarter.

Its biggest operating division is in Europe, and is facing falling steel purchases in sectors such as construction and cars because of the looming downturn and weak consumer confidence. German industrial orders fell in September and production was also sharply lower.

ArcelorMittal's plants in Europe are now producing at an annual rate of around 28 million tonnes of steel a year, compared with the 36 million in 2007 when demand for steel was strong.

The cuts in output in Europe are being made through temporarily shutting some of the company's mills across France, Germany, Spain, Belgium and Luxembourg. About 3,600 of ArcelorMittal's 60,000-strong European workforce are working part-time on lower pay.

That's around 5.5 million tonnes below the May figure and daily average output, a more accurate comparative measure, fell a sharper 6.9% on month, to 1.76 million tonnes from 1.89 million tonnes in September and close to 2 million tonnes a day midyear.

The China Iron and Steel Association said average daily production of crude steel began to fall sharply in mid-October, just when spot prices for iron ore were crunched, falling from around $US170 - $US180 a tonne (including freight) from Australia, to the range $US115 to $US120 a tonne last week.

They have since recovered to around $US132 a tonne this week.

Iron ore output rose 41.4% on year and 3.9% on month to 132.4 million tonnes in October.

Output was up 26.4% in the first 10 months to 1.1 billion tonnes, but at current prices, it is said to be unprofitable for domestic mines and barely profitable for all but the majors, BHP Billiton, Rio Tinto and Vale with the vast reserves and low cost mines and higher quality product.

Australian, Brazilian and Indian mines usually ship ore of around 58 - 65% iron, with most deals priced on an iron content of 62%.

Chinese domestic ore is of much lower quality, many mines produce ore in a range of 25 to 40% Fe.

Fortescue Metals Group is one who thinks the recent dive in ore prices has bottomed out for the moment and demand from Chinese steel mills remains high.

Fortescue received an average iron ore sales price in the September quarter of $US160 a tonne, but spot prices are well under that level.

CEO Nev Power told reporters after the miner's annual general meeting in Perth on Wednesday that "We've seen the iron ore price now turn on the Platts Index back to $US131 (per tonne) today and that shows the iron ore price has bottomed out at $US115 a tonne and climbed back up.

"Going forward, we would expect to see continued strong demand out of China and continued strong iron ore prices."

The quality differential is why we should be sceptical about breathless stories in the Chinese media about plans to 'free' the steel industry from the grip from the likes of BHP, Rio and Vale.

There was another one of those yarns this week:

It said (repeated a story from earlier in the year) that "China will boost the domestic supply of iron ore to a large extent during the 12th Five-year Plan period (2011-15) in order to rely less on the three world mining giants - Vale, Rio Tinto and BHP Billiton - sources with the China Iron and Steel Association (CISA) told the Economic Observer Monday".

"The percentage of domestic supply will rise to over 45 percent by 2015, the sources said, a substantial rise from the level of 32 percent in 2010.

"As more than half of China's iron-ore demand is met through imports, primarily from Brazil and Australia, the pricing of iron ore has become a heated issue.

"Luo Tiejun, an official with the Ministry of Industry and Information Technology, said Sunday that a supply guarantee system for iron ore would be written into the steel industry's five-year plan and that iron ore supply would be regarded as an issue of national security, a move welcomed by industry insiders.

"Dominance of the global market by the big three firms has resulted in limited profit margins for Chinese steel producers.

"In 2010, the profits of the big three exceeded the total profits of the 78 largest Chinese steel producers," said Luo.

The Chinese government intends encouraging consolidation in the industry, so that the top 10 steel firms can account for 60% of the steel output by 2015, up from 48.6% in 2010, according to the industry's five-year plan.

China says it will be producing 750 million tonnes of steel a year from 2015.

Based on the 10 month figure for this year of 580 million tonnes, it will have to increase production by around 60 million tonnes, or less than 10% in three years.

That implies a sharp slowdown in the growth of output (and demand for steel making materials) from 2012 onwards.