An excavator piles up iron ore at the Port of Qingdao in Qingdao city, east Chinas Shandong province, 8 May 2012. (AAP Newswire)
Shares and commodities markets in China tumbled yesterday on weaker than expected trade data, concerns over the outlook of economy and the problem of excess capacity in industries such as steel. The Chinese media even had a name for it: Black Monday.
Copper, zinc, gold, silver and aluminium futures have all been hit hard on the Shanghai Futures Exchange. Iron ore suffered its biggest one-day fall in more than four years, dipping below $US105 per tonne. The chief equity strategist from the Bank of Communications International told Caixin that the iron ore price could decline further due to the raising stock of iron ore and the constant arrivals of new shipments.
According to Mysteel’s latest data, the total stock of iron ore stored at 41 Chinese ports is about 10.857 million tonnes, 2.56 million tonnes more than the same period last year. The consultancy also surveyed 163 steel mills in China and only 78.99 per cent of their blast furnaces are operational -- a 4.81 per cent decline from the same period last year.
The total stock of crude steel at major Chinese cities is about 1033.57 million tonnes, the highest level since July last year.
Beijing’s aggressive policy to fight pollution and address the deeply entrenched problem of excessive capacity in steel and cement industries will put further pressure on the price of iron ore -- Australia’s largest export earner.
In Premier Li Keqiang’s government report delivered last week at the annual session of the Chinese parliament, he mentioned tackling excess capacity five times and vowed to clamp down hard on overcapacity.
The goal for this year is to reduce steel production by 27 million tonnes. To put that in perspective, that is five times the annual production of steel in Australia. In 2015, Beijing plans to cut pig iron and steel production by another 30 million tonnes.
Hebei province, the largest steel-producing province in China with a production level equal to the combined total of 27 countries from eurozone, is at the forefront of China’s battle to reduce steel production.
The provincial government has dictated quotas to all counties and cities to reduce capacity by 60 million tonnes. On February 23, the provincial government raided 15 steel mills in five cities, forcibly pulled down 16 blast furnaces and got rid of 1.49 million tonnes of steel production and 6.71 million tonnes of pig iron production in a single weekend.
However, Chinese analysts are saying that the government is only eliminating idle capacity at the moment, which is low-hanging fruit. The resistance will get fiercer once the government starts to target operating blast furnaces.
One of China’s largest traders in iron ore from Hebei province told Business Spectator that he would buy only 25 million tonnes of iron ore this year -- five million tonnes less than last year -- during a recent trip to Australia.
Economic Observer, China’s leading business publication, says that steel mills will be most at risk under the government's new policy of cracking down on overcapacity.
Beijing is also sending strong signals to banks and local governments that have been complicit in supporting the expansion of steel industry that now is the time to stop. Chinese steel mills are heavily leveraged and many would fail without generous financing packages.
There will be tough times ahead for the iron ore price as Beijing gets more serious about addressing deep structural problems of overcapacity.