Steel Products Prices North America

Chinese Iron Ore Bubble Popping…

March 7, 2014

Steel Market Update has been writing about the iron ore pricing and inventory bubble growing in China. We have been forecasting that it is only a matter of time before the bubble will burst and iron ore prices will collapse. The issues are a slowing Chinese steel sector, pollution issues plaguing the Chinese government, bank loans to Chinese steel mills and iron ore traders going unpaid and non-banking sectors providing steel companies and traders’ loans using iron ore as collateral.

As of Friday, March 7, 2014, the Chinese ports held 103.85 million metric tons of iron ore.

SMU received the following email from our Asian iron ore trader who has been warning us about the situation in China over the past couple of months.

“The Banks announced this afternoon they are going to intervene on Iron Ore at the Ports now. Buyers/Mills are requesting extensions on the payments and since the Buyer’s have to provide 20-30% Deposit when Opening the LC and against Negotiation of the Documents, the Banks are now advising they will Confiscate the 20-30% and auction the Iron Ore at the ports to recover the 70-80% as they are refusing any extensions.

The s__t is about to hit the fan.

With this announcement today, the domestic market tumbled and dropped by USD3/mt and Platts just came out down USD3/mt as well! 62% is now standing at USD112/mt CNF FO. We will be close to USD110/mt level we discussed a few weeks back very, very soon.”

Steel Market Update went back to our source and asked if steel export prices are being impacted and how many steel mills and iron ore traders are affected. This is what we received back:

“Can only answer the ones I know…

Steel Export prices are already on the move downwards. I will update you on Monday of new levels.

As for raising capital by dumping off some of the steel already produced, a lot of that steel has already been used as collateral for loans John. Also in China, when Mills or Traders receive an LC, they can discount that LC with the Banks at 3% or 5% and take the cash money in advance of even production or export. If something should happen and the goods are not shipped, then the LC receiver has to refund the cash.

How many companies are going to be affected and does anyone have any guess, not yet John as the announcement only came today, but from what we have heard, many Traders will be hit the hardest. Steel Mills started unloading their “on water” cargos a few weeks ago, meaning reversing the chain of Buyer – End User to Buyer – Seller.

With over half the tonnages at the ports at high prices John, and the market taking 10-12% decreases
recently, and no upswing in sight, it was inevitable that the Banks make a stand to cover their own
asses as they know they are not going to get paid.”

SMU believes $110 62% Fe fines is inevitable. The question is will ore dive below $100/dmt and how big will the losses be at the larger mills who are stuck with ore at $120+?