Ore, coal demand falls

China's economic slowdown has led to weak demand for iron ore and coal in the domestic and overseas markets as the nation's steel producers and power plants reduce production and generation, analysts said.

Some Chinese steel mills may have deferred shipments agreed to under long-term contracts with foreign traders, but not those under short-time contracts, said Zhang Lin, senior researcher at the Lange Steel Information Research Center.

Last week, iron ore prices dropped to $144 a metric ton, the lowest this year, which will obviously affect of foreign iron ore traders' business, she said. "For long-term iron ore purchasing contracts, Chinese steel producers may reduce import volumes because of lower demand in the country, which will lead to lower prices," Zhang said.

She said she had not heard of any defaults so far.

Shougang Group, one of the largest steelmakers in China, said the company didn't defer any iron ore or coking coal cargos, but it added that steel prices are "really weak".

The majority of steel mills in Shanxi, Hebei and Shandong provinces have halted production, said Dai Bing, senior analyst at coal.com.cn, a coal-trading website.

He said falling demand for steel led to the reduction of iron ore and coking-coal purchases.

"The central government carried out a series of policies to control the real estate market which resulted in a huge drop in steel for construction," he said. "Thus, the demand for iron ore and coking-coal fell and prices have been going down."

Concerns over slowing growth have intensified in China after weak economic data for April was released last week. Growth in industrial production, imports, exports, fixed-asset investment and bank lending all eased in April.

Zhang said two giant miners, BHP Billiton Ltd and Rio Tinto Plc, are being stricter about approving new mining projects and Vale Ltd, the biggest iron ore producer in the world, postponed its new project plans.

In addition to the steel industry, coal-fired power plants are generating less electricity, meaning less demand now exists for thermal coal.

A senior official at one of the five largest power generation groups in China, who declined to be identified, said the company's thermal coal inventory had increased to more than 15 days of use because less electricity is being generated.

"Coal prices have dropped a little, but that cannot help coal-fired power plants eliminate losses," he said.

According to Dai, coal prices have been falling for three weeks so far.

The price of thermal coal at Qinhuangdao port of Hebei province was 780 yuan ($124) a ton on Tuesday, down 5 yuan from the beginning of the month.

Average coal inventories at power plants now stand at 25 days. In Shaanxi, coal inventories could cover up to 26 days, Dai said.

The growth rate of power consumption in the first four months dropped to 6 percent and the figure in April was 3.7 percent year-on-year, the slowest in the past 16 months, showing further evidence of an economic slowdown.