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The $17b iron ore slump that lined Chinese pockets

The slump in iron ore prices boosted the Chinese economy — but robbed Australian exporters like BHP and Rio Tinto of significant revenue in 2012. But the tables are turning.

What’s $US17 billion or so between friends like the Chinese steel industry and iron ore suppliers such as Australia? That’s the size of the multi-billion dollar income boost the Chinese industry got from the iron ore price slump in 2012 — a wealth transfer which in turn battered the Australian federal budget, confidence in this country and the share prices of leading mining companies here and around the world in the closing months of the year.

That huge benefit was detailed in the analysis of figures issued in China at the weekend. They showed China paid $US95.6 billion in total for the record 743 million tonnes of iron ore imported last year, down a sharp 15% from the $US112.4 billion China paid for 686 million tonnes of ore imported in 2011 when ore prices hit all time highs of well above $US180 a tonne.

That’s a gross benefit of around $US17 billion dollars for the Chinese steel companies and the Chinese economy. And a loss for exporters like Australia (BHP Billiton and Rio Tinto) and Brazil (Vale). No wonder those mining giants saw big hits to their 2012 profits (and will report poor profit figures for the six months to December) in the next month. On top of this, iron ore importers in Japan, Taiwan, South Korea and other markets also paid less for their shipments from countries like Australia and Brazil.

The drain of revenue from exporters could have approached $US30 billion on a global basis.

Not only did the Chinese gain from the fall in prices, they imported more ore at prices much lower than the all-time record annual average price in 2011 of more than $US160 a tonne. At the time China was paying up to 45% less than the 2011 average. The estimate of the average price paid per tonne last year was around $US128 a tonne, down from the more than $US163 a tonne in 2011 — a fall of more than 21%. No wonder China surprised by boosting imports by more than 8% last year, with the increase running at more than 10% year-on-year in the final months of 2011.

World iron ore prices dipped to lows around $US87 a tonne in the third quarter of last year, then rebounded strongly. That included a 25% jump in December alone, when Chinese imports were a record 70 million tonnes. Low stocks and the need to build up inventories ahead of the lunar new year break in February saw the Chinese steel mills boost imports of ore, which in turn helped drive December’s surge.

Chinese steel industry websites say stocks hit a low of around 73 million tonnes late last month, down from around 99 million tonnes mid year as production cuts and then a sharp rise in demand for steel products saw the oversupply drawn down and the mills forced back into the market for new supplies. Iron ore industry sources expect the steel mills will again chase imports of ore in January before slackening off in February and March for the holiday slowdown and the subsequent rebound in production that always occurs around the time of the lunar new year and in the following month or so.

After months of remaining silent, the mills, through industry association China Iron and Steel Association, said last month the industry was troubled by overcapacity with prices at 1994 levels. No mention of the multi-billion dollar benefit the Chinese industry obtained from the 2012 slump in iron ore prices.

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    Posted Tuesday, 15 January 2013 at 6:40 pm | Permalink

    Is it really “wealth transfer” when global prices are lower?

    Is the problem simply that the MRRT isn’t good enough?

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