With global prices of iron ore falling to a five-month low in April, the Chinese steel industry, the world's biggest consumers of iron ore, has bought a record quantity of the mineral on the spot market last month, leading to the closure of nearly half of China's iron ore mines.
Speaking at an economic conference organised by the Australian investment bank Macquarie Group in Hong Kong yesterday, Anthony Loo, Rio Tinto's managing director for China, said, "We believe that perhaps up to half of domestic iron ore mines are currently shuttered as imports - lower cost producers around the world - have displaced domestic production."
Since iron ore prices had risen by nearly 400 per cent during the past five years, many small iron ore mines opened up in China. However, since the latter part of last year, prices have come crashing due to global economic slowdown, which has affected the steel industry and forced nearly all these small mines to shut.
Chinese steel industry, which imported a record 57 million tonnes of iron ore in April, an all-time high, up 9 per cent from March and up 33 per cent compared to last April, had said that they it buy more iron ore in the world spot market in order to push the prices of iron ore down even further.
Iron stocks at China's two largest iron ore ports in Qingdao has neared to its maximum capacity, while in Rizhao, the stocks were up 300,000 tonnes.
The northern province of Hebei, which has hundreds of private, small steel mills, have built up inventory of iron ore to gear up for more production since their low operating costs have yielded more profits.
Chinese steel producers, who bought nearly $60 billion of iron ore last year, are seeking iron ore price cuts of more than 40 per cent on the annual contracts, while large miners like BHP Billiton, Rio Tinto and Vale are uwilling to more than a 20-per cent reduction. (See: Global iron ore miners locked in pricing battle with China)
Chinese steel exports have declined by 55 per cent in the first quarter this year, despite which the country imported a record volume of iron ore in February, March and April even though steel production did not rise to match the volume of imports.
In February, China imported a record 46.74 million tons of iron ore another 52.08 million tons in March and 57-million tons in April. These record imports have created a stockpile of 70 million tons iron ore at ports, more than double the normal level of 30 million tons.
The China Iron and Steel Association said in the first quarter, out of the top 10 iron ore importers, six of them were traders, compared to the normal two or three who usually import iron ore.
They feel that these traders have imported iron ore in large quantity at low price in the hope to garner huge profits when the price of the minerals goes up.