Hammered ore prices threaten Chinese iron miners

"To be or not to be" -- that is the pressing question for Chinese iron ore producers teetering on thin profit margins that have been squeezed by lower-priced imported ores and sluggish steel demand at home.

Chinese ore miners, who are believed to produce at a cost of 80 to 120 U.S dollars per tonne, can handle smaller price cuts than foreign competitors whose production costs are estimated at 40 to 50 U.S. dollars per tonne.

Therefore, the more price-sensitive domestic iron ore producers are losing favor with China's steelmakers, who are struggling with contracted steel demand in the world's second-largest economy.

Imported iron ores with more flexible prices and higher quality appeal more to the country's steelmakers. Iron ores from the "Three Mines," namely BHP Billiton, Companhia Vale Do Rio Doce and Rio Tinto, constitute the bulk of China's ore imports.

Ore prices have wobbled freely on the basis of supply and demand since being unpegged from a yearly agreement struck between providers and consumers to set a basis price for iron ores for the whole year.

The volatility of ore prices have put Chinese iron ore miners in an unsafe situation in which a group of domestic miners who produce at around 120 U.S. dollars per tonne will be kicked out of the market if the ore price dips below such that level.

To make matters worse, the oversupply and waning demand of steel products in China has dragged down steel prices, affecting domestic iron ore producers.

Shrinking demand has moved a number of steelmakers to halt production. According to a survey by Mysteel.com, a market observer website, 56 out of 163 steelmakers nationwide had put out the fires under their furnaces as of the end of August.

The lackluster steel sector reported heavy losses this year, contributing to rising ore inventory. Stockpiles of iron ore at China's major ports topped 100 million tonnes in the first half of 2012, marking a record high.

However, as China's economy has shown signs of stabilizing, steel demand is likely to pick back up in the coming months.

China's purchasing managers index (PMI), a primary gauge of industrial production, and fixed-asset investment both posted rises in October.

In addition, the National Development and Reform Commission (NDRC), China's top economic planner, approved a string of new railway construction projects in September, creating room for steel consumption.

As steel demand is likely to gain traction, the halted production capacity is expected to be restored.

The thawing manufacturing sector has helped put a dent in iron ore stockpiles, and ore stockpiles at ports have decreased by nearly 9 million tonnes since August.

But experts have warned that if steel demand in the future can not keep pace with the potential boom in output, the price of steel, as well as steelmakers' profit margins, will fall again.

At that time, Chinese iron ore miners who can not withstand heavy price drops will be vulnerable to a "gain-then-lose" cycle.

It is not safe for China to fully rely on imported ores, as high dependence on foreign iron ores may culminate in a monopolized ore price, which is harmful to the country's steel industry in the long run, experts said.

China has rolled out favorable policies to encourage its domestic mining enterprises to invest in overseas mines.

In the first half of 2012, Chinese enterprises invested 1.42 billion U.S. dollars in 64 overseas projects on solid minerals, according to Chen Xianda, vice president of the China Mining Association.

"For Chinese enterprises, I think it's worth tracking opportunities in resource-rich regions overseas," said Guo Jianwei, a senior official for monetary policy with the People's Bank of China.