Benchmark Australian iron ore for delivery to China fell $2.80, or 4.5 per cent, to $59.30 a tonne yesterday, according to The Steel Index, a price reporting agency. Iron ore futures on China’s Dalian exchange fell 3.1 per cent to a three-month low.
Iron ore is a key profit generator for several leading mining companies, including Rio Tinto, BHP Billiton, and Vale of Brazil.
China’s Premier Li Keqiang said downward pressure on the economy was building and the government would cut overcapacity and tackle pollution in his opening speech to the National People’s Congress in Beijing. He also set the country’s economic growth target at about 7 per cent, the lowest since 1999.
China’s official steel industry association said this year that up to 70 per cent of the industry could not meet the country’s environmental standards.
The Ministry of Environmental Protection carried out inspections in the eastern city of Linyi in Shandong province and Chengde in Hebei province this year, ordering them to shut projects that violate standards, according to Chinese media reports.
The country’s steel mills need to spend up to 100 yuan ($15.96) a tonne in capex to avoid closure and meet the new regulations, according to Standard Bank, even as they struggle with poor liquidity conditions and tight margins.
China’s consumption of steel fell for the first time in 30 years last year, even as exports from steel mills reached record levels.
Despite the prospect of more stringent pollution standards, steel production shows no signs of letting up. Chinese mills increased crude steel output for the first 10 days of February by 8.14 per cent to 1.77m tonnes a day, compared with an average of 1.72m tonnes across 2014, says Standard Bank.
The biggest iron ore miners are bracing themselves for a further decline in prices as a wave of fresh supply hits the market later this year.
Rio Tinto, which makes the bulk of its profits from the commodity, is set to cut hundreds of jobs in its mines in the Pilbara region of Western Australia. Rival BHP has also been cutting costs at its iron ore operations in Australia.
