Iron ore price drops again as yuan slides

The benchmark import price of 62% iron ore fines at China's Tianjin port on Wednesday dropped 1.1% to $117.80 a tonne, down 12.2% since the start of the year and the lowest since July 1 last year.

The globe's most active steel future – Shanghai rebar – was languishing near a record low of Rmb3,300 ($540) per tonne as the crisis in China's steel industry show no signs of easing and stockpile of iron ore at ports top 100 million tonnes.

$120 a tonne for the steelmaking raw material has long been considered a price floor for iron ore – many of China's hundreds of small scale miners, which struggle with high costs and low iron content, quickly become unprofitable at these levels.

With active backing from the Chinese government fearing too great reliance on imports, domestic production of iron ore has rocketed to more than 1.4 billion tonnes as small blast furnaces face restrictions on accessing imports.

But with domestic quality declining from more than 30% iron content a decade ago to just 21.5% in 2013, the country's large steel mills have been opting to buy ore from Australia, Brazil and South Africa.

Imports jumped to a record 820 million tonnes last year and the trend has only accelerated this year. Using 58%-Fe and above also reduces the need for sintering, cuts costs and reduces pollution, something Beijing has been cracking down on.

But China's iron ore miners are now also finding support from the People's Bank of China, which have engineered a decline in the value of the yuan to a seven-month low.

The renminbi, as the currency is also known, does not float freely, but making it behave more like a market driven unit is in line with China's new leadership's drive to make the economy less reliant on investment.

A sliding currency also makes imports more expensive and domestic Chinese producers more competitive.

Down the line this could reverse the trend towards greater imports.

And would come just as supply from the rest of the world ramps up and predictions of a market surplus this year climb to as much as 90 million tonnes.

Image by chinaposters.net on Flickr.