China’s steel meltdown will ripple around the world – by Carl Mortished (Globe and Mail – March 27, 2014)

The Globe and Mail is Canada’s national newspaper with the second largest broadsheet circulation in the country. It has enormous influence on Canada’s political and business elite.

LONDON — There’s too much mining, and too much iron ore. Overproduction will take the price of steel’s raw material down by almost a third over the next few years, says Australia’s official forecaster. A supply glut could be just part of the problem, because a swathe of Chinese steel makers are burdened with too much debt – and Beijing is not keen on bailouts.

Australia’s iron triumvirate – Rio Tinto Group, BHP Billiton Ltd. and Fortescue Metals Group Ltd. – are ramping up production, and chasing market share at the expense of prices. The frenzied digging means that the country’s exports of ore are expected to rise by almost a fifth to 680 million tonnes this year.

Australia’s Bureau of Resource and Energy Economics is predicting that by 2019, the iron ore price will fall from last year’s average of $126 (U.S.) per tonne to $87.

The price has already declined by a fifth since the beginning of this year, moving close to $100 per tonne, amid concerns that China’s export engine is slowing. China now accounts for half of world steel production and the profits of the big three iron ore producers, Rio, BHP and Vale SA of Brazil, are highly dependent on the appetite of China’s steel producers. However, the picture is far from pretty in the People’s Republic, where the money is drying up and workers are going unpaid among China’s army of private steel producers.

Highsee Iron and Steel Group, a large private firm in Shanxi province, is mired in debt. There is a long queue of creditors and banks seeking recovery, according to Caixin, the Chinese online business magazine. The company owes between 15 and 20 billion yuan ($2.7-billion and $3.6-billion) and the firm has shut five of its six furnaces.

Meanwhile, the China Iron and Steel Association has warned that steel makers are facing the worst period since the century began, with high debt levels and metal piling up in warehouses. Chinese banks are running scared of producers, which have joined property developers as one of the sectors vulnerable to liquidity issues. In Hebei province the local government has been warning local banks not to extend credit.

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