Beijing rescues giant iron ore importer

Beijing to the rescue

The Chinese government and the country’s steel industry faced a big test on Tuesday with Sinosteel, one of the biggest importers of iron ore in the country, on the brink of defaulting on its bonds.

Sinosteel is primarily a trading company, but also operates steel mills and owns chrome operations in South Africa and iron ore projects in West Africa and Australia. The company has been on life-support for more than a year, hurt by the combination of low iron ore prices and weak domestic steel demand.

Sinosteel is one of only 113 elite state-owned firms centrally managed by Beijing and on Tuesday the Chinese government once again bailed out the company. In an unprecedented step, the government intervened in the corporate bond market where $315m in interest payments from Sinosteel came due on Tuesday.

The South China Morning Post reports that it was “the first time state regulators have intervened in a corporate credit case. In the five previous cases in the country this year, the companies were bailed out by shareholders.”

Under President Xi Jinping the communist government has promised to increase transparency and allow market forces determine the future of sectors, most notably steelmaking, which have been characterized by overproduction and unprofitability for years. Today’s action shows Beijing is not quite ready to let the many creaking state-owned enterprises sink or swim by themselves.

Rio Tinto (LON:RIO) and  Sinosteel inked a deal in November last year to extend a long-term iron ore joint venture in Australia’s Pilbara region, which had delivered about 250m tonnes of iron ore under an offtake agreement.

At the time of the signing Rio’s chief executive Sam Walsh said the operation had become one of Beijing’s longest running and most successful partnerships with Canberra and “a model” for economic cooperation between the two countries.

China is responsible for more than two-thirds of the world’s iron ore consumption and forges almost as much steel as the rest of the world combined.  Benchmark iron ore prices continued to drift lower on Tuesday, with the import price at the port of Tianjin falling 0.8% to $52.10, a fresh 12-week low. The steelmaking ingredient is down 26% this year following a 47% decline in 2014.

The World Steel Organization, last week forecast that steel demand in China is expected to decrease by -3.5% in 2015 and -2.0% in 2016, after hitting a demand peak in 2013.  Global steel demand will shrink 1.7% to 1.5 billion tonnes this year before expanding modestly in 2016 according to the industry body.