For the third year running, China''s appetite for foreign iron ore appears to have cooled off in June. Though the trend is expected to affect the half year earnings of majors BHP Billion and Rio Tinto, whose results are due next month, a little known fact is that China continues to sew up deals to develop iron ore mines in Australia.
Over the weekend, China''s third largest steel maker, Wuhan Iron and Steel Corporation entered into a joint venture with the Australian Centrex Metals Ltd (CXM) to develop iron ore mines on south Australia''s Eyre Peninsula, which ostensibly has deposits of 2.282 billion tonnes of iron ore. While the Chinese firm paid A$ 51.5 million (US$ 43.7 million) to CXM for mineral exploitation rights, it also paid another A$ 50 million to cover the cost of the first-phase of exploration. With an estimated investment of US$ 1.5 billion, the project is expected to annually produce 33 million tonnes of raw iron ore.
Another South Australian miner, IMX Resources Limited recently received final approval enabling Chinese firm, Sichuan Taifeng, to increase its stake in the company and invest in a South Australian iron ore, copper and gold mine. The Foreign Investment Review Board approved the investment by Sichuan Taifeng in IMX and the Cairn Hill project. Sichuan Taifeng is to acquire up to 19.9% of IMX immediately, and acquire 49% of Outback Iron Pty Ltd, the IMX subsidiary, which indirectly holds the Cairn Hill operations.
Australia''s largest iron ore pellet producer, Grange Resources, is also looking to China to bail it out. The firm is scouting debt funding from China to help finance a A$ 1.8 billion iron ore mine in Western Australia. The firm will be talking to financiers in China to shore up the debt finance. Reports indicate that Grange''s largest shareholder, Jiangsu Shagang Group Co, China''s biggest closely-held steelmaker, is to arrange debt for as much as 70% of the cost of the proposed Southdown mine. The mine is a joint venture with Japan''s Sojitz Corp and is expected to start output toward the end of 2013.
Imports down
From the second half of 2009, Beijing has been easing its stimulus measures given the run-away inflation and impending housing bubble. Though China''s trade surplus has rebounded in June to its highest level in half a year, China''s purchases of industrial materials appears to be falling, according to the government''s economic data.
June imports of iron ore dropped 15% from 55.3 million tonnes in June of last year, and those of copper fell 31%. Iron ore imports fell 9.1% in June to 47.2 million tonnes, as compared to the 51.9 million tonnes in May. Reports indicate that iron ore imports in December 2009 totalled 62.16 million tonnes. With a fall of 15 million tonnes or 25% drop, the slump is substantial. Chinese steel prices are also down 17% in the past few months. Moreover, spot iron ore prices are now below the contracted levels from BHP Billiton and Rio Tinto at US$ 128-130 per tonne on Friday, and 7.5% lower than the US$ 139-140 a tonne the previous Friday. According to Li Wei, an economist with Standard Chartered, China''s commodity-led import growth has already passed its cyclical high. The result is bound to show up in cooling growth in investment projects and purchases from abroad.
India worried
Asian major India is also worried about losing ground in China. India accounted for a fourth of Chinese iron ore imports in 2005, but has seen its market share drop to 17% in 2009. India appears to be losing ground to the likes of Australia, Brazil and South Africa. Given the slow offtake by Chinese mills, India''s iron ore exports declined 15% in the first quarter of the financial year 2010-11.
Industry body, the Federation of Indian Mineral Industries, has noted that the country''s exports of iron ore slipped to nearly 20.8 million tonnes in the first quarter of the current financial year, as compared to 24.5 million tonnes in the corresponding quarter of the previous year.
China is a major buyer of low grade iron ore from India. But with the Chinese government advising local steel mills to restrict imports of iron ore with Fe content of 60%, there appears to be a lot of uncertainty amongst traders.
News reports also indicate that the Chinese government is working to introduce a resolution which will restrict the import of lower grade iron ore by steel mills, which will further impact demand.
The Federation has noted that out of around 100 million tonnes of annual iron ore shipments, some 40 million tonnes are exported in the form of fines with less than 60% of Fe content.
Market reports indicate that iron ore with 63% of Fe content was quoted between $120-$125 a tonne, a decline of $25-$30 a tonne in the last quarter, ending June. Lower grade iron ore is quoted even lower. China procures 60% of ore from India with Fe content between 60%-64%. Japan and Korea are the other buyers.
Chinese buyers resort to Indian imports to meet the gap in their demand and supply. Moreover, others countries such as Bolivia, Mexico and Vietnam have also started supplying iron ore to China, eroding India''s status as a prime supplier. Reports indicate that Indian iron ore exports to China have also slowed due to the weakening demand for steel from crisis-hit Europe.
However, despite a decline in market share, India has managed to retain its traditional ranking of being the third largest iron ore exporter to China after Australia and Brazil. India shipped about 106 million tons - of a total production of 226 million tons - in the fiscal ended March 31, 2010. Iron ore, slag and ash accounted for $6.4 billion - 63% of India''s net exports to China.
With an 80% rise in Indian exports, two-way trade hit $ 25 billion in the first five months of this year, government officials told reporters. The two countries now expect to beat their $60 billion target for the year.
Though China has been the world''s engine of growth for iron ore, clearly, demand is cooling off. The country''s ongoing monetary tightening is set to impact heavily on global price developments.