China's Record High Iron Ore Stockpiles Causing Concern

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

17 May 2008

Record high iron ore stockpiles at Chinese ports, which has been blamed on speculation by domestic companies, have sparked much concern from the China Iron and Steel Association (CISA) for disrupting the normal domestic iron ore trade, according to a statement released by CISA recently. China's iron ore stockpiles at 23 major ports amounted to 62.16 million tonnes last Friday, up 1.39 million tonnes or 2.29% from the previous Friday. Indian iron ore stockpiles increased 3.98% to 18.3 million tonnes at the time, accounting for 29.4% of total stockpiles, according to Shanghai Mysteel statistics.
CISA has said that iron ore stockpiles at the country's ports significantly exceeded real demand for China's pig iron at present, and thus have imposed great pressure on port and railway transportation. It attributed the situation mainly to moves by Chinese enterprises to mass import iron ore on the expectation of higher iron ore prices in the future.
According to CISA estimates based on domestic pig iron capacity, normal iron ore stockpiles at China's ports should amount to around 40 million tonnes.
"There are two main reasons for such high levels of iron ore stockpiles. Firstly, tight cash flow restricts steel mills from [making] mass purchases at the moment. Instead, they only purchase strictly in line with pig iron production schedules," an official with a leading iron ore trading firm based in Shanghai, who wished to remain anonymous, told Interfax.
"Secondly, Chinese steel mills and iron ore traders are expecting higher iron ore term prices, which China and Australia could reach very soon, and which would exceed the 65% to 71% rise settled between China and Brazil recently. The higher term price will definitely push up spot iron ore prices further. Therefore, most are reluctant to sell iron ore at current prices, and are speculating higher profits in the future," the trader said.
The Chinese market expects that Shanghai Baosteel Group (Baosteel), representing Chinese steel mills, is very likely to accept up to an 85% rise on iron ore term price for 2008 contracts with Australian mining companies BHP Billiton and Rio Tinto. The two miners have infomed Baosteel that they would transfer all their iron ore supply onto the spot market this year if negotiations are not concluded before June 30.
Hu Kai, an analyst with Beijing Umetal, said large steel mills and trading firms who are granted iron ore supplies at term prices are expediting purchases on the expectation of higher term prices in the near future.
"Large steel mills and domestic traders are becoming key suppliers to small steel mills who can only purchase at spot prices. They purchase from Australia and Brazil at term prices and supply the iron ore to those small steel mills at spot prices. Their speculation has also caused high stockpiles," Hu said.
Currently only 118 steel mills and trading companies are granted iron ore import permits, as the government aims to curb speculations through iron ore trades.
Although CISA warned in that companies involved in speculations would have their import licenses cancelled, both Hu and the Shanghai trader doubted whether CISA would take any action.
"Iron ore imports are conducted based on market supply and demand. Any policy could not effectively curb this market action," the Shanghai trader said.
Hu said that iron ore stockpiles would continue to rise in the next few months, as spot prices still have room to increase in the future. "Even though iron ore term price may be settled at an 85% rise compared to last year, current Indian iron ore FOB spot prices are already much higher than the estimated 85% rise in term price for Australian ores," Hu said.
China's iron ore imports reached a record high in April, with 42.85 million tonnes coming in during the month, up 20.1% on the previous month. The country imported a total of 153.49 million tonnes in the first four months of the year, up 15.2% year-on-year, according to preliminary statistics released by the General Administration of Customs last Friday.

Source: Resource Investor