Falling Chinese steel demand means more bad news for iron ore

The pain for iron ore producers is not expected to let up anytime soon, as numbers out of China indicate that steel demand is dropping.

As the price of iron ore declined for a ninth straight week – the worst losing streak for the steel-making commodity since 2008 – China's purchasing managers index for the steel industry fell to 37 in November from 42 a month earlier, according to a Bloomberg post last Thursday. A number under 50 signals a contraction. Meanwhile more steel is being held at ports, with holdings up 2.1 percent to 89.5 million tonnes according to Shanghai Steelhome Information Technology Co.

“Steel production probably fell because weak seasonal demand is compounding the mills’ tough financial position, so an increase is unlikely,” Wang Yongliang, an analyst at Founder Cifco in Tianjin, told Bloomberg. “No doubt that will reduce demand for iron ore. Where ore prices go from here will also depend on supply from the Big Four.”

Vale (NYSE:VALE), Rio Tinto (LON, NYSE, ASX:RIO) and BHP Billiton (NYSE, ASX:BHP) have all been following a scorched earth strategy of raising output and slashing costs to weather low prices and push out competitors. The plan has largely been successful. On Friday Perth-based BC Iron Ltd. suspended work at its Nullagine mine in the Australian Pilbara, an operation it jointly owns with Fortescue Metals Group (ASX:FMX), citing the ongoing slump.

The price, down 46 percent this year, is now in the realm of what Rio's chief executive and long-time iron ore division head Sam Walsh called a "fantasy land" when the price was still north of $60 a tonne.

Meanwhile the glut of steel in China due to lagging economic growth is creating the conditions for a trade war, The Economist reported this week. Between January and October Chinese steel consumption fell by nearly 6 percent to 590.47 million tonnes, according to industry group China Iron and Steel Association. The decline in consumption is affecting producers' bottom lines, with China's steel companies shedding $11 billion in the first 10 months of the year.

Chinese steel mills are therefore looking to dump their product on the open market, a strategy looked at with alarm by China's steel competitors in Europe and the United States.

Analysts at investment bank UBS, quoted by the Economist, figure that China this year will produce 441 million tonnes more than it will consume. The country currently produces around half of the world's annual steel output.