40% of Domestic Chinese Ore Producers Could Close

UNCTAD has forecast that as much as 40% of Chinese domestic iron ore product could close down in the coming years due to rising costs locally, and lower freight costs internationally having made seaborne iron ore more competitive.

The agency’s annual report on the 2008 iron ore industry forecasts what it called a “great Chinese shakeout” resulting in widespread mine closures and even greater reliance on imported iron ore — a key driver of demand for the bulk carrier freight market. “It is probable that between one third and one half of Chinese iron ore capacity will close over the next three years, with 40%, or 130-150m tonnes, being the most likely reduction figure,” the report said.

This could be a nice balancing mechanism for seaborne iron ore shipping rates, since if rates sky rocket, then less domestic producers are likely to close, but if rates fall, more domestic producers close down, removing domestic Chinese iron ore supply and thereby adding to seaborne demand. I have tried to find the original UNCTAD report which Lloyd's List quoted, but don't have the time to dig around their site. If someone has a link, would love to see it. Thanks. Anyhow, continuing...

To further complicate the supply/demand math, thing is, the Chinese government probably wants to be less, rather than more, reliant on foreign iron ore, thus perhaps could support the domestic mining industry. As iron ore production is a highly fragmented industry in China, one can imagine that a lot of cost issues can be solved via consolidation and better domestic transportation infrastructure. Yet we haven't seen much of this yet from the Government (as opposed to what we have seen for the steel industry).

Tom Gidley-Kitchin, mining analyst at Charles Stanley, said: "There are a lot of marginal producers in China. What is interesting is that the Chinese government isn't artificially keeping its own mines in business. As well as it being counterproductive to keep unviable mines open in the current pricing environment, this will also have the positive effect of reducing China's trade surplus."

Nevertheless, the future for Chinese domestic iron ore production is probably one of the biggest variables out there right now for dry bulk. In addition to China's future net import/export status in regards to thermal coal. And of course, China's steel demand growth outlook. Those are probably the top three (not necessarily in that order).

Just don't forget that in the most near-term, China has been importing more iron ore than it even consumes (inventory build). Also, FYI China just found a huge new domestic iron ore mine, though this shouldn't have an impact for quite some time.