Back from the dead? Chinese iron ore miners plot return as prices surge

06 March 2017

Rocketing iron ore prices may prompt Chinese producers to reopen mines shuttered years ago in a sector downturn, potentially tightening the market for marginal foreign suppliers to the world’s biggest importing country, industry executives say.

A revival could help Chinese steel mills cut raw material import costs, boosting margins amid rising steel prices. If more domestic ore is produced, mills could also use that as leverage to push for better deals on seaborne imports from top suppliers like Vale , Rio Tinto and BHP Billiton , traders say.

A booming Chinese steel market pushed iron ore <.io62-cno> to $94.86 a tonne last month, its strongest since August 2014. With Beijing expected to boost infrastructure spending, the raw material looks set to rally further, making domestic production more viable.

“Quite a few Chinese iron ore miners are planning to come back and reopen their mines,” said Pan Guocheng, head of medium-sized miner China Hanking Holdings Ltd . While low prices led to closure of more than a third of China’s iron ore capacity since 2013, Pan expects nearly half of those mines to restart – if the price stays above $80 for another six months.

Hanking is now considering restarting one of three mines it closed when times were leaner. “If the price will stay high,” said Pan, “we are going to seriously re-evaluate if that mine should be reopened.”

A wave of mine reopenings won’t present any immediate threat to Vale, Rio Tinto and BHP Billiton, giants that supply top-grade material that’s an essential element of the input mix used in steel mill blast furnaces.

What’s more, Beijing’s tighter environmental rules could make life difficult for returning mines, analysts have warned.

BARGAINING CHIP

Raw Chinese iron ore only has iron content of about 20 percent, compared to more than 60 percent mined by Vale, Rio and BHP. But processed Chinese ore can go up to 66 percent.

Some mills prefer to use the best grades of Chinese iron ore they can find, rather than lower grade material from overseas.

“We are looking to get more local iron ore but we cannot find a lot of it now,” said an official from a steel mill in southeastern China, speaking on condition of anonymity because he was not authorized to speak to media. “I think they’re just preparing to restart.”

Hanking’s Pan said China’s best grade ores are competitive with lower grade material from Australia, like those shipped by Fortescue Metals Group .

But inland Chinese mills buy Fortescue’s ore to blend with domestic high-grade ore, Fortescue Chief Executive Nev Power said. “Demand… remains strong and we are making very strong margins at the prevailing market price,” Power told Reuters by email.

Nonetheless, traders are betting that if more domestic high-grade iron ore is produced, Chinese mills could use it as bargaining chip with foreign suppliers.

“Mills may use it as leverage – if imported price is too high they will shift to domestic ore,” said one Shanghai-based trader who declined to be identified.

Source – Reuters