by Chris Becker

A bit quieter in China yesterday on the iron ore complex, even if the latest flash PMI surprised to the upside. Here’s the summary:

Spot slipped a little to remain under $80USD while 12 month swaps gained a small amount:

Rebar continues in freefall:

While Dalian futures also continue to slip, putting more pressure on FMG:

Meanwhile, the seaborne supply glut continues to grow apace as Brazil announced it has exported nearly 200Mt of iron ore so far this year (194Mt – almost all from Vale’s operations) compared to 180Mt in same period last year.

This huge glut in relatively cheap iron ore amid the shakeout in iron ore spot price is devastating junior miner hopes (for survival even) which helps the big guns like Vale, and BHP and RIO, in the long run.

However, it seems there is some danger ahead in this strategy particularly when it comes to taking on the domestic extractors in China.

From Reuters:

A large number of small, high-cost Chinese mines have been forced to shut by a collapse in global prices but, overall, domestic output is increasing as the big state-backed producers expand or consolidate.

“Those mines that belong to steel mills or to central government enterprises – and those that were constructed relatively early and where resources are good – all have room for survival,” said Lian Minjie, general manager of Sinosteel Mining, a subsidiary of one of China’s biggest state trading firms, at an industry conference this month.

Rio Tinto said this month it expected 125 million tonnes of capacity to be taken out around the world in 2014 and that 85 million tonnes had already been cut, notably in China, Indonesia, Iran, South Africa and Australia.

Even so, output in China in the first eight months of 2014 rose 8.5 percent from a year before to a record 986 million tonnes, according to the National Bureau of Statistics.

“Many mines aren’t closing down because they are part of the production chain of the big steel mills and they are usually located quite close to the steel production facilities,” said a manager with a private iron ore producer in southern China’s Hainan province.

Going toe to toe with a command economy may not work as most of the mines are actually owned by the steel mills, or the State itself, which is hellbent on keeping employment up even when running a loss. This is being borne out by production figures despite falling prices.

Consolidation is the name of the game with efficiency gains to be had across the board:

Conversely, many bigger iron-ore regions such as Hubei, home of Wuhan Iron and Steel, as well as Sichuan, Guangdong and Anhui have all seen double-digit production increases this year.

In the top producing region, Hebei, iron ore output rose 3.1 percent to 363 million tonnes in the first eight months of 2014, making up 36.8 percent of the total.

Consolidation may have helped reduce average costs. Deutsche Bank, citing data from the Metallurgical Mines Association of China, said costs had fallen 5-10 percent by June from a year before.

Grades and production costs also vary widely, which has kept some miners profitable. Research by Zhu Jinlong, an analyst with the CISA-affiliated Custeel, shows the cost per tonne in shallow, open-pit operations in the northeast stands at 60-80 yuan per tonne, half the cost of deeper mines elsewhere.

“Mines in some regions have been operating at cost or even with losses, and have been forced to cut or stop production (but) mines in other regions are still profitable and they remain enthusiastic to produce,” he said.

Of course, no one saw this coming, let alone the business managers at Roy Hill.

Iron ore daily update (quiet)