Economy

China works to ease iron ore supply strains

(Xinhua)
Updated: 2010-11-18 16:53
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TIANJIN - China, a country hungry for iron ore, is ramping up its mineral exploitation efforts and upgrading its steel-making industry's structure as it deals with its iron-ore supply dilemma.

China produces more than a third of the world's steel and imports 68 percent of the world's steel shipments. But its heavy reliance on iron-ore imports have forced domestic steel mills to accept high prices as they lack clout in annual price negotiations, Jiao Yushu, a consultant for the Metallurgical Mines Association of China said at the ongoing China Mining Congress and Exhibition.

China's self-sufficiency in iron ore was about 30 percent in 2009, when imports soared to 628 million tons, which was a sharp rise from the 384 million tons it imported in 2007, Jiao noted.

The world's top three iron ore suppliers -- Vale, Rio Tinto and BHP Billiton -- which account for 66.5 percent of global iron ore shipments, have monopolized the market and hiked prices, Jiao said.

Chinese demand has led to the three miners boosting their iron ore output. The three's combined annual output rose from 400 million tons in 2004 to 600 million tons in 2009. But even as Chinese demand gooses their profits, their appetite for price hikes persists, consistently pressuring Chinese steel mills, Jiao said.

To gain a stronger hold in price talks, the three announced plans to shorten the length of the agreements in international iron ore prices, ending the decades-old annual benchmark pricing system.

"In the first nine months, iron ore price cost about 1,200 yuan ($179) per ton, up 49 percent from a year earlier," said Wang Min, vice minister of the Ministry of Land and Resource.

Higher costs have led to thinner profit margins for the country's steel mills.

Data from the China Iron and Steel Association (CISA) shows that the average profit margin of the country's 77 large and medium-sized steel enterprises was 2.84 percent in the January-September period, with the September's figure down to 1.16 percent, lower than the average 5 percent of the country's other industrial enterprises.

Moreover, 10 of the 77 steel enterprises reported losses in the first three quarters, totaling 2.39 billion yuan.

Facing the gloomy reality, the Chinese government and steel enterprises are strengthening diversity of iron ore supplies. They are also exploring for iron ire deposits in more locations while exploiting domestic deposits.

They are also increasingly buying overseas mines to wean themselves off their dependence on imports.

China's investment in mineral exploration rose 17 percent from 2008 levels to 27 billion yuan in 2009, data from the Ministry of Land and Resources show.

Some 5 billion tons of iron ore have been discovered in land resource surveys over the past 12 years, said Xue Yingxi, an official with the China Geological Survey under the Ministry of Land and Resource.

Domestic iron ore output surged to 880 million tons in 2009 compared with 260 million tons in 2003, according to Jiao.

In the first nine months, China's domestic iron ore output increased 25.9 percent year-on-year to 780 million tons while iron ore imports declined 2.5 percent from a year earlier to 458 million tons, said Wang Min.

The iron ore shortage in China is expected to ease gradually as more domestic deposits are discovered and as Chinese companies acquire overseas mining companies, said Zhou Zhongshu, president of China Minmetals Corp.

Zhou added that domestic iron ore output is expected to exceed 1.3 billion tons within three to five years.

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To combat the dominance of the world' s big three suppliers, major Chinese steel enterprises like Sinosteel, Baosteel, Wuhan Iron and Steel and Angang Steel have invested in Australia to acquire iron-ore mining rights, Jiao said.

Stakes in overseas iron ore mines, including those under construction, translate to an annual output of 190 million tons, accounting for 30 percent of the country's imports, said Zhou.    

Meanwhile, the government announced in April further efforts to restructure the steel industry. It said it will shut down outdated steel-making facilities and encourage mergers and acquisitions in the industry to save energy and upgrade the industry.

So far, Hebei province, a major steel-making base, has eliminated inefficient steel producers that had an annual production capacity of 10 million tons, according to Zhou.

The measures are poised to slash steel output demand and ease tight iron ore supply, said Zeng Jiesheng, a senior analyst with steel information provider Mysteel.