No Stability in China Due to “Rebel Mills”

We thought our readers might be interested in part of the conversation between SMU, the service center and our Asian trader:

Service Center: “Not sure what your Asian contact is hearing, but I’ve been following this daily tracker for Iron Ore from Macro Business, and have found some of their insight helpful.
 
The combination of today’s $120/ton IO level, plus the Chinese IO inventory rise, is very concerning. The US (and rest of the world) lived off of and enjoyed, the meteoric rise in Chinese steel production in the last 10 years, which lead to major upswings in raw materials, which lead to major upswings in steel prices. I’m thinking we might be moving back into a “brave new world,” one where China is stable to slightly down, while rising supplies of raw materials continues for some time, depressing prices of the same, and putting pressure on steel prices.
 
The US certainly has some direct insulation from these developments due to duties, etc, but we ultimately always get affected +/- over time.
 
Not trying to sound the doom and gloom scenarios of late but I just think that there are a number of reasons steel prices could get very sluggish/bad and stay that way for an extended run. The EAF mills are much better situated as they mainly need to convert over scrap, but Integrated mills are not so lucky.”

From Asia our ore and steel trader provided the following insights from his perspective:

Asian Trader: “Firstly, everyone who has their head on straight knows that China has always paid too much for Iron Ore, and that is a fact. With the Buying Power China has, prices have always been too overrated in my opinion as well as “some” others who are Realists and have been dealing with China for over 15 years including myself.
 
Today the Billet price in China is RMB2770/mt and again, historically low, and the last time Billets hit this price, Iron Ore was at USD110/mt CNF FO, but I think I mentioned this in a couple of emails ago that we have not reached this level on iron ore.  Again, Iron Ore prices are pegged to Billet prices in China 80-90% of the time.
 
One thing that I must disagree with is the statement of “Moving Back” to where China is Stable or Slightly Down… China has “never” been Stable John, not as long as I can remember, and it will never be stable as long as there are Rebel Steel Mills in the market. Trust me, there are a lot of them, and no matter Profit or Loss, they are in the game till the end as they have to produce to survive at a Profit or Loss due to the Banks call on Loans.
 
Why do you think the Banks have only provided 30% of the Total Credit Line to Steel Mill applicants (i.e. Application for USD30 million and only getting 30% of that amount, not 30 mills applying and only 30% of the Applicants getting the money… They all get Credit, but so far only 30% of what they have requested). This policy will bring in some bigger players into the market for Ore, State Owned Enterprises, who have cash and credit, and they will be controlling downstream feed to the mills who are strapped for cash or credit as there will be alliances where I/O is provided to the mills for off take
of cheaper steel. It is already happening with companies like Minmetals and alliances with steel mills for Wire Rods, HRC, CRC etc…
 
I checked with CISA today and the Published Port Stocks for Ore at a HISTORIC high now with 41 Major ports holding 100.91 MILLION TONS! This does not include the recent purchases AFTER Chinese New Year which easy add another 800,000mts.”

It is a Buyer’s Market in China

Asian Trader: “Prices are negotiable is all I can say for the moment as very few enquiries are consummating into a real business as when prices are met by the mills, the Buyers renegotiate lower and the mills just refuse. There is serious intent to do the business by the mills, but it is a buyer’s market now as you know and there is a lot of fishing going on as well as price war….”