Don't let China iron ore buying fool you: Top analyst says demand is bad

Cranes unloading imported iron ore from a ship at a port in Rizhao, Shandong province, China, on Dec 6, 2015.
Cranes unloading imported iron ore from a ship at a port in Rizhao, Shandong province, China, on Dec 6, 2015. PHOTO: REUTERS

SINGAPORE (Bloomberg) - Don't be fooled into thinking China's surging iron ore imports are a proxy for the health of demand in the biggest user. 

They're masking an industry in trouble, according to the analyst who accurately forecast the price slump below US$40 a metric ton.

"It's totally wrong to just look at the China import number to measure demand strength - a lot of people were talking about that, I saw - that's a market mistake," said Andy Xie, an independent economist who predicted in February that iron ore prices would sink into the US$30s this year.

"There's no aggregate increase in demand even if China is importing more because it's just translating" into steel exports, he said.

Data on Tuesday showed China's iron ore imports rose 22 per cent in November and annual purchases may overtake last year's record 933 million tons, while steel exports have exceeded 100 million tons for the first time as mills battling losses have stepped up exports to compensate for falling domestic demand amid cooling economic growth.

"Final demand for steel is dropping," Xie, a former Asia- Pacific chief economist at Morgan Stanley, said on Tuesday from Hong Kong in a phone interview, adding iron ore prices may remain below US$40 next year as China's demand shrinks.

"You look inside China, commodity prices are just inching down in a straight line from coal, iron ore, everything. The demand situation is very bad for all commodities."

Iron ore has tumbled 46 per cent this year as producers including Vale SA, Rio Tinto Group and BHP Billiton press on with expansions to cut costs and defend market share just as demand from the largest consumer China slows.

Prices have plunged 80 per cent from their peak in 2011. Ore with 62 per cent content delivered to Qingdao fell 1.1 per cent to US$38.65 a dry ton on Tuesday (Dec 8), a record low in daily prices compiled by Metal Bulletin dating back to May 2009.

The commodity plunged below US$40 this week.

While iron ore has retreated with commodities from oil to copper this year, it remains well above levels seen in recent decades. The commodity traded as low as US$10.51 a ton in 1988, when annual benchmark contracts were negotiated between the largest miners and steel producers, according to data from the International Monetary Fund.

That pricing system was superseded by a shift to spot rates as China's demand ballooned.

"The rise was an exception and we're back to the old normal," Xie said. "Iron ore from an investment perspective will become a low price, stable margin and low growth industry for many years to come."

Crude-steel output in China will drop 23 million tons to 783 million tons next year, according to the China Iron & Steel Association.

The nation's leading industry group has reported wider losses and noted that while official interest rates in China have been cut, mills faced higher funding costs.