China Won't Come to the Rescue in Global Iron Ore Supply Crisis
(Bloomberg) -- China’s strict environmental regime means domestic iron ore mines won’t boost output to meet any supply shortfall after Vale SA’s dam disaster, according to the head of a major Chinese mining group.
The global iron ore market is in the grip of a supply shock after the deadly dam burst last month in Brazil put as much as 70 million tons of annual supply at risk. As a wave of analysts boosted price forecasts, Goldman Sachs Group Inc. suggested higher prices could spur extra output from Chinese mines.
“I really feel this is questionable,” Pan Guocheng, chief executive officer of Hanking Group Co., said in a phone interview. “If China’s mines could produce more they would already be doing so because, to be honest, prices have been pretty good in recent years. It’s not because of prices that mines have been closing, it’s because of environmental and other reasons.”
China has a substantial ore-mining industry, but production has been cut in recent years as the content is lower-grade and higher-cost than foreign supplies, and producers have suffered amid a strict environmental clampdown. Domestic output is dwarfed by cargoes from overseas and the nation is the world’s largest importer, taking in more than 1 billion tons a year.
In the wake of the disaster and Vale’s force majeure, benchmark spot prices touched the highest since 2017, with Citigroup Inc. and Commonwealth Bank of Australia flagging the prospects for a near-term surge to $100. Despite this potential incentive, Helen Lau, analyst at Argonaut Securities Ltd., judges that Chinese miners are likely to be cautious about restarting production, given the need for new capital spending to support any expansions.
“Maybe some marginal mines could restart, but that’s not going to change the overall trend,” said Hanking’s Pan, who estimated in 2017 that two thirds of small-to-medium iron ore mines in China had shut in past three years. “Domestic production is going to be significantly lower. This is the trend for years to come.”
The market overreacted to the supply interruptions caused by the dam burst and mine suspensions, according to China’s top steel industry group, which said the loss of cargoes from Brazil can be offset by flows from elsewhere and it’ll be hard for prices to sustain gains.
There’s a surplus of the raw material in China at present, with high holdings at ports amid slow seasonal steel demand, the China Iron and Steel Association said in an analysis on its website.
Hanking’s Pan outlined three key domestic pressures on iron ore output in China. Operations in areas such as northeast Liaoning are gradually depleting, many small ones in the steel hub of Hebei have closed on the anti-pollution curbs, and many low-grade mines have been ordered shut by the government to prevent environmental and landscape damage.
“China is going to be stricter and stricter in terms of environmental measures, they are not going to loosen any of these regulations,” Pan said. Hanking itself has shut two of the three mines it operates in its listed unit, he said. The group also has interests in gold and nickel mining, as well as electronics, retail and manufacturing.
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