End of an era for iron ore?

The world steel association released its July production report overnight and the news is not especially good:

World crude steel production for the 62 countries reporting to the World Steel Association (worldsteel) was 130 million tonnes (Mt) in July 2012, an increase of 2.0% compared to July 2011.

China’s crude steel production for July 2012 was 61.7 Mt, an increase of 4.2% compared to July 2011.

Elsewhere in Asia, Japan produced 9.3 Mt of crude steel in July 2012, up by 1.2% compared to the same month last year. South Korea’s crude steel production for July 2012 was 5.9 Mt, an increase of 4.4% compared to July 2011.

In the EU, Germany produced 3.6 Mt of crude steel in July 2012, a decrease of -2.1% on July 2011. Spain’s crude steel production for July 2012 was 1.0 Mt, 7.0% higher than July 2011. In July 2012, the UK produced 0.9 Mt of crude steel, up by 6.6% compared to July 2011.

Turkey’s crude steel production for July 2012 was 3.1 Mt, an increase of 9.7% compared to July 2011.

In July 2012, Russia produced 5.9 Mt of crude steel, an increase of 3.6% compared to the same month last year.

The US produced 7.4 Mt of crude steel in July 2012, up by 0.9% on July 2011.

Brazil’s crude steel production for July 2012 was 3.0 Mt, -4.1% lower than July 2011.

The crude steel capacity utilisation ratio for the 62 countries in July 2012 declined to 78.7% from 80.4% in June 2012. Compared to July 2011, it is 0.8 percentage points lower.

So, why is an increase of 2% in annual output and 4.3% in China bad? Well, it’s growth ain’t it? Lower growth than we’re used to, but growth nonetheless. If steel and, more to the point, iron ore prices are going to get monstered in circumstances of growth then that says something pretty telling about overcapacity in the supply of both. Capacity utilisation is only down 0.8% over the year yet prices are down 40%.

And overnight the plunge in the complex continued:

That’s a break of the neckline on the huge post-GFC head and shoulders pattern for 12 month swaps. And spot looks like it has a fatal attraction for $100.

The ore market needs production cuts. If they come locally, it will be end of stronger for longer, the end of volumes offsetting price. It’s a rude shock that’s looming.

Houses and Holes
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      • Bloomberg say local Chinese miners can’t compete at the price due to their grade quality being too low, so expect to see a bounce in prices of 39% by the end Q4 and demand will spike ahead of winter due to port issues.


        $23 billion of investment in new mills to stimulate auto-making and housing, which will boost demand for iron ore and help revive the nation’s flagging economy


        Truly bizarre article. Kloppers said he doesn’t see a “dramatic” upside to its price, Vale says Ore prices may rebound as soon as next month because of declining stockpiles in China and the nation’s rising demand for construction…


        The 62 percent iron ore arriving China’s Tianjin port, an industry benchmark which touched a low of $106.40 a ton on Aug. 21, may trade at $148 a ton in the fourth quarter, according to the median of seven analyst estimates compiled by Bloomberg.

        Traders also build iron ore stockpiles in the fourth quarter because freezing weather disrupts ports in the winter months, according to Steve Rodley, London-based managing director of Global Maritime Investments Ltd., which operates 64 ships.

        Increasing exports to Chinese mills will help revive earnings at Vale and Rio, the top exporters of the raw material, who both reported in the past month a decline in profit. Rio’s net income may almost double to $11.4 billion this year, according to the average of 17 analyst estimates compiled by Bloomberg.

        Rio’s income set to double? What pot have they been smoking?

    • yeah, if you grind iron ore up real fine and sprinkle some in your rollies, then there is a definite hallucinogenic effect.

      And it makes that chart look of iron ore prices look sort of like the late Vi Greenhalf asking for a goodnight kiss….

  1. The question is: will the MineBot still be cheering the virtues of the AUD at $1.05 with ore below $100/t? If not then when? Its really gotta be hurting now.

    • He awaits his orders…we’re actually on the verge of the death cross, where iron ore spot is worth less than the dollar…who would have predicted that outcome? Ken Henry maybe…

    • Didnt all the Minebots and spruikers say “well we go India” when China goes down? Dont hear much on India these days. That is all I heard from people in Australia. Where is India?

    • Well it never hurts for Minebots……(and you wouldnt expect the shills turning up to blog here to acknowledge it anyway – they will just vanish before they do so)

      The jingle just changes to…..

      ‘Its an era of new opportunity for iron ore’


      ‘the next iron ore boom era is just around the corner. Get your investment, call for tax breaks etc in now!’


      ‘India is the new China’

      yada yada yada

    • Lorax, I do not ‘cheer’ the high dollar. I do point out that the high dollar has brought many benefits to Australians. As I say, swings and roundabouts.

      It seems for the moment the heat has come off calls for intervention!

  2. Have the mining lot started to sell their expensive homes yet? I don’t know. But if they have/do, then we might deduce that the end of Houses and Holes, is near…

    • Jumping jack flash

      anecdote alert: One of the guys I work with made a fortune when he worked in mining for 20 years, seems like he spent it all on houses.

      He’s getting out though, geting ready to retire at the beach. He reckons he’s sold 3 places and still has another 3 and a unit to sell.

      I’m sure he’s not the only one trying to offload 7 properties.

  3. Here at the edge of the Bowen basin, brother-in-law who works in the coal industry confirmed last weekend of rising fear of unemployment among large numbers people being paid $150 000 a year for doing nothing particularly special.

    Well I warned my fellow townsfolk that mining booms don’t last forever so don’t go digging yourself into a million bucks worth of debt, but did they listen?

    • I don’t begrudge ordinary people on these high salaries as its the only way to redistribute the wealth since the RSPT failed and owning shares is a waste of time.

      • I don’t begrudge them either, it’s jsut sensible and prudent to realise that mining booms don’t last forever.

        • Mining BoganMEMBER


          Nervousness in the west too. I think some are starting to realise that being up to their tattooed necks in debt for shaky assets may not be quite so wise anymore…

          • + 1 MB. especially the Project boyz.I detect some distinctly nervous anal twitching going on.

            But once this existing build out completes the construction lads will migrate to the Maintenance Shut Down contractors. And crowd out the already overcrowded camps!

  4. This sound like a global recession/depression and central banks will try to step in soon. We have Draghi on the 6th Sept, and maybe other will follow. The PBoC is doing some small stimulus, but there are no short term solutions.

    Watch the markets fly on the 6th though.

  5. The most interesting statistic is the amount of steel produced by China alone…6 times that of Japan, which is the second largest producer. So one country is currently responsible for almost half the demand. Is that level of production sustainable in the long run? I assume that the first tier of developed nations, UK, Germany, US, Japan produced steel at much higher rates in the past, during their industrial expansion phases…it would be interesting to compare the rate of production per head of population in those countries at a similar point in their development with China today. I suspect the Chinese rate is way out of whack, even accounting for population and their great leap forward.
    I understand that at least some of the production may be to support exports of manufactured goods containing steel…but both Japan and South Korea would be well ahead of China in export volumes of steel I suspect, mostly due to ship building and motor vehicles.

    • Thinking about it a bit more….a substantial proportion of the crude steel production in China may be exported, which explains the large disparity in production volumes if developed countries have outsourced steel production to China….but I assume that model would have been at work for many decades so I am still struggling to come to terms with a country with 1/6 of the global population currently responsible for almost half of the steel production, and for that to grow at 4.3% would have China producing 120Mt (twice what it produces today) by 2028.

      • I am still struggling to come to terms with a country with 1/6 of the global population currently responsible for almost half of the steel production

        Welcome to the China skeptics club Russell! You are not alone in struggling to understand how China can continue along such a steel-intensive path. Sadly, our policymakers have pretty much bet our economic future on it continuing forever.

        Here is good read from last year: SocGen on China’s construction bubble

        And here’s an RBA Bulletin on China’s steel industry.

        BTW, more than half China’s steel is used in the construction sector with only 6% used by the car industry.

        The RBA also says this about China’s steel exports:

        over the past few years have been declining as a share of total domestic production.

        So that gives you an idea how dependent global steel consumption (and Aussie iron ore exports) are on one sector in one country, namely, the Chinese construction sector.

      • Russell, it will be interesting to see how China deals with overproduction via major cost cutting and sales to international customers.

        The steel sector in China is an area the Chinese authorities have been endeavouring to restructure for same years and the present situation may play very well for the authorities, flushing out the most inefficient producers.

        Nonetheless, China will remain a major player in global steel although the sector may be in for a few volatile months.

        • Overproduction?
          Flushing out inefficient producers?

          I thought stimulus was around the corner and the Chinese government was going to build a gazillion new apartments for low-income earners?

          I thought China needed another 20 years of double-digit FAI growth?

          I thought a billion peasants were clamouring to move to the city and buy newly built apartments?

          Have you had a software update or what?

          • Were you not aware of the longer-term plan to restructure the steel industry in China. Has been ongoing for a few years, surprised someone who alleges such interest failed to note it.

            Double digit growth off the agenda. As we know the authorities has announced plans to construction some 33 million apartments as part of an affordable housing drive. Expectations are for early 2013.


        • 3d1k,

          “The steel sector in China is an area the Chinese authorities have been endeavouring to restructure for same years ”

          I’m not so sure. The “Chinese Authorities” and the steel producers are a very very close knit club. Symbiotic relationships abound such that it’s hard to tell who is on what team. A restructuring would definately hurt those same authorities hence the reluctance even refusal to reform.

          Look for lots of cheap steel dumping and chaotic self preservation strategies I’d say. This is a mega industry , huge influence and lots of official local mojo behind it. It’s going to get ugly.

          The best we could do is try to avoid being part of the collateral damage.

          • I can assure you GSM, restructure of the steel sector is part of the plan. China steel production ranges from mega-facilities running attractive economies of scale and thousands of small, even backyard factory style operations. Ideally via a process of mergers and closure the steel sector will more or less be confined to 6-8 major players (and subsidiaries). There is numerous information available online.


            I agree the sector carries real clout but this process works in favour of the big operators…

            In regard to dumping, didn’t Bluescope reference expectation of surge of cheap steel from China in coming months. Not dumping of course, trade. And all part of China now ‘pursuing its “Going Abroad” strategy, deploying its massive “national champions” overseas to further the government’s objectives, which include exploiting natural resources and raw materials, obtaining technology and expertise, and increasing China’s economic and political influence on a global scale.’

            There you have it.

    • All thats been done to death (check the big miners presentations) and you could argue that China still has some upside on a kg/capita basis (though cement use seems to be a bit toppy, but again not the highest intensity of use out there). And YoY growth numbers for the remainder of the year could be good given the comparison on a slowing half last year. Just that perhaps absolute steel production may not be much higher for the year.

    • I would say huge. A few weeks back read reports of IO brokers (hoarders) in China selling below cost. No doubt that continues and the precipitous price drop since just confirms it. Since then, reports of BHP selling IO fines at sub $100 have been heard of. Not good signs.

      My guess is we will need to see some meaningful supply shut in in order to see price declines halted. That too does not look good as Sth Am, Africa as well as our beloved Pilbara are all in process of ramping up. The best bet would be a curtailing of local Chinese IO production to take some supply off the table.

      The lowest cost IO producer is BHP.They are nervous. Says it all.

  6. Investing in a savings account is a sure bet, your gains will be minimal given the extremely low interest rates. But don’t forgo one completely. A savings account is a reliable place for an emergency fund, whereas a market investment is not.