Chinese Steel Crisis Causes Iron Ore Price To Plummet

The Steel Index, an important industry barometer, issued a statement late last week in which it claimed that significant fines at China’s Tianjin port have triggered a steel crisis in that vast country that has, not surprisingly, caused a substantial drop in the price of iron ore all over the globe.

In truth, the price for a ton of iron ore fell this past Thursday, May 15th, by a full two percent to its lowest level in nearly two years, since September, 2012. At that time, the price for iron ore dipped below $100 per ton and stayed that low for about two weeks.

This is clearly disturbing news. China is the world’s largest consumer of steel and a major buyer of iron ore. Any problems it experiences affects the entire industry -- globally. In fact, the price of iron ore, is now less than one hundred dollars per ton for the first time since 2009, roughly four years ago, except for the brief two week “blip” that occurred in 2012, as noted earlier.

The Chinese crisis actually caused futures trading at major Asian exchanges for iron ore deliveries to drop by a hefty 3% for the fiscal third quarter to just $98.50 per ton.

The main problem behind the current crisis seems to be rooted in a huge drop in demand for iron ore in China’s steel industry event hough production of steel is rising in the vast country.

When one considers that China’s annual steel production is generally equal to that of the rest of the world -- combined -- it is easy to understand how the drop in demand for iron ore in China deeply affects -- and hurts -- the entire worldwide industry.

China’s steel industry has been suffering for quite some time now -- from poor management ... serious overproduction ... a continuous lack of profitability ... and from under-utilization of the steel it produces. The harsh reality is that the country has produced about two hundred tons of excess steel that has gone unused and, at this time, appears to be unnecessary.

There is no doubt that steel production in China has been -- and continues to be -- too high even though the government has been working diligently to slow down production in order to help local economies throughout the country and to save jobs, as well.

The slowdown in Chinese demand for iron ore has definitely triggered a drop in the price of steel -- by about fifteen percent -- and a drop in the value of iron ore itself by a whopping 25.4%. That is, by any measure, significant.

At the heart of the problem has been the fact that in credit-scarce China commodities and companies and corporations have been using iron ore as collateral for short-term business deals. That has damaged the price of iron ore. It is alarming to note that as much as forty percent of all collateral in Chinese business deals involves the use of iron ore.

Interestingly, and perhaps importantly, companies in countries other than China have been ramping up iron ore production , a fact that has also worked to hurt the price of the valuable raw material.

In Australia, for example, organizations such as Rio Tinto and BHP Billiton have increased iron ore production in 2014 by a very significant one hundred seventy million tons.

That increase in production may not be helping the price of iron ore, but it has gone a long way toward keeping Australian workers on the job and earning regular income. And that is, of course, a very good thing for the economy of the “down under” country. 

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