Author: Paul Ploumis16 Jun 2014 Last updated at 08:15:17 GMT

 

LONDON (Scrap Monster): Sharp declination in the iron ore prices this year could force China to cut around 80 million tonnes of mine capacity. This is about one fifth of China’s net annual output, according to UK based Consultancy Wood Mackenzie.

 

The Chinese mines’ ability to withstand a constant iron ore price fall has been disputed since the fixed annual pricing was scrapped for short term indexing five years ago. Domestic industry of China is fragmented highly, with highest costs, mainly for the coastal area producers. The costs were well above the imported ore price.

 

The further closure of mines would probably benefit Fortescue Metals Group, BHP Billiton and Rio Tinto, which mine from Australian Pilbara iron ore belt on much higher profit margins, said Andrew Hodge, Wood Mackenzie analyst. He added that the Vale of Brazil would also benefit from it.  The benchmark iron ore price also fell to a 21 month low of about $91.50 per tonne, reported last week end. This is due a supply glut smothered a market faced with decreased steel demand. So far, the iron ore price has also plunged a third this year.

 

Andrew Hodge estimated about 40 to 50 million tonnes of higher cost mine production in China, mainly in the coastal region, where the quality of iron ore is low and was already put aside for shutdown. And, this could rise up to 8 million tonnes for the rest of this year. The total amount of domestic production in the coastal area will be in distress condition at the present level. He also noted the China’s met local iron ore production at about 350 million tonnes per year. He said that the when the iron prices fell below $60 per tonne in 2009, China faced great number of mine closures as the domestic producers were not able to operate at a profit.

 

Hodge commented that there had been some mine shutdown and were yet not become wide. Rio Tinto breakeven at around $43 per tonne and for BHP, they need a $45 price so as to continue in the black.  Brazil’s Vale is higher at $75 per tonne because of the longest transportation distance from Brazil to China. Fortescue said during Monday that they would invest about $275 million for building four iron ore vessels for the company itself in order to cut reliance with the shippers outside. He expects exports of iron ore by Australia to increase by above 100 million tonnes this year.