Chinese Steel Mills May Default on 4Q Iron Ore Contracts after Imported Ore Price Plunge

SHANGHAI, Oct. 17 (SMM) -- Spot prices for imported ore plummeted last week, and the price for Indian fines (63.5% Fe content) was USD 168/mt, down USD 11/mt from the pre-holiday level, and down USD 21.5/mt since mid-September. However, iron ore prices in Qian’an region once rose by RMB 30-40/mt driven up by rising billet prices after China’s National Day holiday. Significant declines in imported ore prices were attributed to frequent bid requests offered by BHP Billiton and Rio Tinto, with significantly increasing supply caused by frequent bid requests and weak demand driving imported ore prices down.

Current prices for Rio Tinto’s PB fines have fallen to USD 159/mt, while iron ore contract prices for 4Q were about USD 166/mt, leaving a price spread of USD 7/mt. In addition, steel prices posted larger declines than iron ore prices. Furthermore, finished steel inventories held by steel mills were high due to sluggish downstream demand, adding to their capital pressures. Therefore, steel mills have to cut production or default on iron ore contracts under the pressure from high costs, losses and tight cash flows. Generally speaking, steel mills will not choose to cut or suspend production unless they suffer huge losses, since such action will cause mills to lose market shares, which will in turn result in more serious losses. In this context, steel mills will try their best to reduce costs and strictly control raw material inventories, with the default on iron ore contracts becoming their best option.  
 
Steelease sources report Chinese steel mills have begun to default or are considering a default on 4Q iron ore contracts, and renegotations by steel mills are also under planning.