Rising Iron Ore Prices Push Some Chinese Steel Mills into the Red

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Chinese steel mills are caught between the proverbial rock and a hard place.

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Iron ore prices surged to their highest level in five years on the back of mine closures in Brazil and robust demand, the ABC reported.

Vale’s Feijao mine disaster, which killed around 250 people, has resulted in the loss of around 6% of seaborne supply since late January, the ABC reports.

The market is feeling the squeeze.

Iron ore inventories at Chinese ports have dwindled away to the lowest level in more than two years. The current price is approaching U.S. $120/metric ton, still well short of the record U.S. $191/ton in early 2011 or the $160/ton reached in the last big rally seven years ago. However, the current price is still rising inexorably and resulting in mill margins becoming so pressured that some producers have slipped into the red.

Chinese steel futures are reacting to the tight market with rebar prices hitting a near eight-year high and hot-rolled coil climbing to an all-time peak, Reuters reported. Steel demand from downstream sectors in China is reported to be very strong, yet finished steel prices are not rising fast enough to spare steel mills from becoming squeezed in the tight raw material supply market.

Needless to say, with delivered cost prices from Australian iron ore mines into China at around $30 per ton, Rio Tinto, BHP and their smaller brethren are making hefty margins. But in recognition of the probability that Brazil’s mine closure issues are more short term than long term, Australian miners are not investing in major new projects. Rather, they are spending cash paying down debt, making cost-saving investments and distributing surpluses to shareholders.

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Elevated iron ore prices are not expected to persist into next year. The consensus forecast is for prices to drop back into the $80-$90 range by next year, ABC reports, so Chinese steel mills’ pain is likely to be relatively short-lived.

Following consolidation in the industry and the closure of many illegal or unlicensed producers, the remaining behemoths will be able to ride out the few months of negative or poor margins in the expectation falling raw material costs and/or rising finished steel prices will come to their rescue later this year.

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