Chinese miners keep digging for iron ore despite most losing money

Chinese miners keep digging for iron ore despite most losing moneyIron ore miners in China, the biggest consumer of the steelmaking commodity, keep digging away even though about 75% of them are losing money, in an attempt to retain market share.

The situation, however, can’t continue for much longer said industry officials Friday according to Reuters. If anything, they added, is paving the way for closures and mergers.

"I would like to thank the big four miners for driving prices down because it has given bigger domestic mines an opportunity and forced small miners to cut production," Gao Yan, deputy general manager at the mining unit of Chinese steelmaker Angang Group, was quoted as saying.

According to market estimates about 1,500 iron ore mines in China would be forced to close this year, eliminating 20% to 30% of national capacity.

The problem for Chinese producers, which feed 35% of the local demand, is that their ore is lower grade than the foreign imports. At the same time, their production costs are at the upper end of the big three.

Prices in the pits

But while small and private iron ore miners may choose to sell or at least halt production, state-owned operations are locked into contracts with mills. That may force them to keep going, adding to the global glut that has almost halved prices in the past year.

According to MBIO Index, seaborne iron ore prices fell again Friday to $53.14 a tonne, the lowest since records began in 2008, and market predictions anticipate they are likely to drop below $50 before the end of the year.

Rio Tinto (ASX:RIO), BHP Billiton (ASX:BHP), and Vale (NYSE:VALE), the world’s top iron ore producers, continue to increase output, despite calls by other producers, such as Fortescue Metals Group (ASX:FMG) to band together to cap output.

And while "the big three" are still making money, questions remain about the viability of their heavily indebted rivals Fortescue and Gina Rinehart’s Roy Hill project.