Market steels for fall on China glut

A SURFEIT of steel products in China's factories is set to crimp demand for Australia's iron ore exports, and analysts say it will take months to fix the problem.

By InvestSMART · 31 Aug 2012

By InvestSMART ·
31 Aug 2012

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A SURFEIT of steel products in China's factories is set to crimp demand for Australia's iron ore exports, and analysts say it will take months to fix the problem.

Iron ore stocks were smashed yesterday after the price of the metal fell $US4 a tonne overnight to near three-year lows of $US90.30. In the past month alone the global price of iron ore has lost 23 per cent.

The move came as speculation spread that Fortescue had approached about 20 banks as it seeks a $1.5 billion loan.

A range of international banks are considering joining the facility and are processing credit approvals, according to Bloomberg. A spokeswoman for Perth-based Fortescue declined to comment.

Analysts said Chinese steel production was increasing in the first six months of this year while construction was slowing down.

"This isn't a story that's going to disappear overnight. It is going to take months and months for Chinese inventories to clear," Westpac chief currency strategist Robert Rennie said.

Official steel prices are being cut and some Chinese steel plants are closing their doors. Zinc production has been cut back significantly and coal production is dropping.

In the three months to July, China's steel production was running at record levels. It produced 182 million tonnes in that time. In the first six months of the year, it produced 687 million tonnes: a record.

UBS's long-term outlook for iron ore is $US70 to $US80, with the fall being driven by extra supply from new projects rather than weak demand from China.

"I don't think anyone expected iron ore prices to drop as quickly as they have and that's from the demand side as we're seeing a slowing in China and opportunistic de-stocking," said UBS Perth office head Tim Day. "On the supply side, once it slides below $US120 you start to see a lot of the marginal producers dropping out."

As demand for iron ore falls, it's bad news for Australia. Last year iron ore accounted for 20 per cent of Australia's exports.

Prominent hedge fund manager Jim Chanos is betting on iron ore producers struggling as Chinese demand slows, singling out Fortescue Metals, saying it's a "value trap" and short-selling the stock, betting that it will fall.

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Frequently Asked Questions about this Article…

Why have iron ore prices fallen sharply recently?

A glut of steel products in China has pushed down demand for iron ore, helping drive prices lower. The article says iron ore fell about US$4 a tonne to near a three‑year low of US$90.30 and lost roughly 23% in the past month as Chinese inventories built up and producers de‑stocked.

How does a China steel glut affect Australian iron ore exports?

When Chinese steel inventories are high and production outpaces construction demand, Australia’s iron ore exports suffer. The article notes falling demand for iron ore is bad news for Australia — iron ore made up about 20% of Australia’s exports last year.

What did UBS and analysts say about the long‑term outlook for iron ore prices?

UBS’s long‑term outlook cited in the article is US$70–US$80 a tonne, saying the fall is being driven more by extra supply from new projects than weak Chinese demand. UBS’s Perth head Tim Day also warned that once prices slide below about US$120 some marginal producers will start dropping out.

What role did Fortescue play in the recent market movements?

Speculation that Fortescue had approached about 20 banks seeking a US$1.5 billion loan contributed to market jitters. The article says the speculation coincided with a sharp sell‑off in iron ore stocks, and Fortescue declined to comment through a spokeswoman.

Are other commodities or industries being hit by China’s steel slowdown?

Yes. The article reports that official steel prices are being cut, some Chinese steel plants have temporarily closed, zinc production has been cut back significantly, and coal production is dropping as a result of the slowdown.

How long will it take for Chinese steel inventories to clear?

According to Westpac’s chief currency strategist Robert Rennie, this isn’t a quick fix — it will take months for Chinese steel inventories to clear, not an overnight correction.

What risks are iron ore producers facing amid the price decline?

The article highlights several risks: rapid price drops driven by Chinese de‑stocking and excess supply from new projects, weaker construction demand in China, and the potential for marginal producers to exit the market if prices fall much further.

Which investors are acting on their view that Chinese demand will slow, and what are they doing?

Prominent hedge fund manager Jim Chanos is betting that iron ore producers will struggle as Chinese demand slows. The article says he has singled out Fortescue Metals as a “value trap” and is short‑selling the stock.