Chinese Iron Ore & the Glut of over capacity...price sunk to $114 (circa)

Australian Iron Ore looks to be dropping, and is likely to depreciate to the $97-105 mark. As parties with common-sense know this growth cannot continue, it also shows that the China Iron and Steel Association commentary shows that growth is limited now. This also contradicts the assertions and targets made by the Chinese Government for Growth. 

More importantly, and far from commented on by the press is the fact the Iron Ore Price has deteriorated near 3% since Rio met up with China Steel Industry Association executive VP Zhu Jimin. The significance is the imbalance of supply and demand that has long been commented on and was specifically discussed by Rio & Zhu Jimin. The main reason for the price distortion is the "mismanagement" of positions by importers/buyers. They appear "now" to have been given basics training about the supply/demand variables and how if there's a surplus this means a reduction in price. Alas better late than never, but credit days appear to increase marginally its certainly implying a stress in the sector. 

What could be interesting is China's now apparent belief that anything 'private companies' should cover its own risks (See Solar Bond Default). By the main producers in China maintaining their production guidance the private players will be put under stress by price depreciating and lower margins; benefiting (ironic) the larger and/or Government back companies. The knock on for Japan doesn't look positive either. 

So with steel production "not yet being curbed" as it should be with an over capacity of around 140M tonnes this year, Iron Ore is going to come under further stress. The consensus for demand is between 650-700Mts of steel with production looking more like 800-850Mts.

Anyone for a margin call? More than likely...without a huge knowledge of the steel sector, it’s implied by the oversupply and glut in the market, that it’s not unreasonable to expect 3.5 to 5 years of steel market conditions toughening significantly. Unlike most industries, consolidation in the industry would only lead to greater losses as the costs are weighted towards the production, synergies won't be massive. Survival of the fittest here we come...

All the best Fraser

Edit: It would appear China Iron and Steel Association (CISA) has also met BHP executives on 27th February 2014 & Rio on 05th March 2014