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Mining sector feels pinch as China cuts iron ore demand



Tony Grant-Taylor

October 09, 2008 11:00pm

THE mining sector is starting to feel the effects of the global financial crisis with China asking iron ore producers to postpone deliveries.

The once-booming Chinese steel mills are cutting demand for iron ore as economies in other countries slow and want fewer Chinese goods.

Shares in Australia's fourth-largest producer Mt Gibson Iron plunged as much as 32.5 per cent yesterday after admitting some customers had asked for a number of scheduled deliveries to be postponed.

Fortescue Metals also acknowledged weakening demand but said it had not had any scheduled shipments rejected.

The two giants, BHP Billiton and Rio Tinto, said shipments were proceeding as usual.

But in a statement to the Australian Securities Exchange, Mt Gibson said a backlog of iron ore at Chinese ports had reduced demand for iron ore.

"Mt Gibson has received requests from a number of its customers to delay hematite ore shipments scheduled for the second quarter of the financial year," the statement said.

The spot prices for iron ore, which earlier this year were well above contract prices, have slumped in recent months.

Cash prices for iron ore imported by China fell 17 per cent to 1000 yuan ($A214) a tonne in the last week of September, the biggest fall since June 2006.

UBS expects contract iron ore prices, which have underpinned revenues into Australia, to fall 15 per cent next year, the first decline in seven years.

Until recently, most analysts were predicting price increases of 15 to 30 per cent.

"The rest of the world is cutting production and that means they don't need China's exports, so China's production in steel is going to slow," UBS head of resources research Glyn Lawcock said.

"That puts pressure back upstream on raw material suppliers like iron ore and coking coal producers."

China has an excess supply of ore with stocks of about 70 million tonnes at its 20 largest ports.

The China Iron and Steel Association said Vale, the world's biggest iron ore producer, is scheduled to meet Chinese steel mills next week to ask for a second price increase for the current contract year.

Vale, Rio and BHP have already won price rises of between 70 and about 96 per cent for current year exports.