A quiet day yesterday in the ore complex, although the 12m swap softening is not great. It looks well and truly stuck.
No news today but it’s worth reiterating yesterday’s story in the AFR about China’s move to protect local ore miners:
China is looking to halve the tax rate paid by its domestic iron ore producers in an effort to maintain local supply and drive down the prices received by Australian and Brazilian miners.
…To maintain domestic production the Chinese government is now considering halving the 25 per cent tax rate paid by miners, the state-run China Securities Journal says.
“That would feed straight through to lower prices,” said Ian Roper, the Shanghai-based commodities analyst with CLSA. “It will help at the margins to make Chinese iron ore producers a bit more competitive.”
Xu Xiangchun, chief information officer at consulting firm Mysteel, said the tax cut could be implemented in two to three months.
“The government has been investigating policies to help the mining industry since the beginning of this year,” he said.
“They don’t want China to be overly reliant on imported iron ore.”
This is not the end of this. It is the beginning. As I’ve argued before, China will protect its local ore production. This kills, stone dead, the $120 price floor theory, which is based on the idea that high cost Chinese production will be knocked out by cheaper imports. Here’s the cost curve chart:
In the forthcoming period of slow steel production growth, with China protecting its marginal producers, the avalanche of expanding seaborne iron supply that is already locked in will not be friendly to prices. The $120 price floor is a price ceiling that will get lower and lower. The cancellation of sea borne iron ore expansion projects will have to continue.
