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China's iron ore imports continue to slow

Shanghai: Despite blast furnace output being at all time highs, iron ore exports to China continued to lag in March, according to a report by MacQuarie Commodities.

"With the recovery in the rest of the world continuing at pace, China's once dominant market share in seaborne trade shows signs of being further squeezed. Thus, with Chinese production currently showing no signs of abating, this will increase the pressure on Chinese domestic ore supply to respond, sustaining further short-term spot price momentum.
"Combining exports from Brazil, Australia and India, which together account for ~84% of seaborne supply, total exports in March were 833 Mt on an annualised basis. This is 13.8% higher than in March 2009, and only marginally below the 850 Mt recorded in December 2009. This certainly doesn't tell the whole story however, with exports to China down 9.9% YoY to 500 Mt annualised, while ex-China rose 94.2% YoY to 314 Mt annualised.
"March represented the third consecutive fall in exports to China, and the 40 Mt annualised drop was the largest since Q4 2008. In contrast, exports to other countries rose by 39 Mt annualised, with total seaborne trade stagnant on the month. Brazilian exports to China were 10.5 Mt in March, down from peak levels of 15.8 Mt in August/September 2009, while Australian exports fell to 23.5 Mt compared to December's 27.8 Mt peak. As a result, China's share of seaborne exports from these countries has fallen to 60% - down 5% MoM and well below the 76% recorded in March 2009.
"In Brazil, from a peak of 82% in February 2009, the share of exports destined to China has fallen back below the 50% level - a stark turnaround. While Vale's exports continue to disappoint in general (and have helped keep seaborne supply extremely tight) despite the completion of shiploader repairs at Ponta de Madeira, the recovery in European production has squeezed China out the market. Exports to China for the first quarter as a whole were 20% down YoY to 32.2 Mt, and 28% below Q3 09 levels.
"A similar story is evident in Australia, where exports to China totalled 66.3 Mt in 1Q09, up 4% YoY but 11% lower than peak levels in 2Q 2009. In contrast, exports to other destinations were 79% higher YoY at 33.5 Mt.
"Unquestionably, the March data highlights the strength of the recovery ex-China. While there is no doubt some of the 13% rise is down to customers maximising contract tonnages ahead of an April 1 price rise, it does show continued confidence that output levels can continue to grow. If we take iron ore exports as a lead indicator of pig iron output ex-China, it suggests output levels could rise from 456 Mt/y in February to the 475-485 Mt/y region in March and April. We reiterate our view that the next couple of months should see strong positive news flow in the steel sector, as mills rebuild internal stocks ahead of the likelihood of increased prices.
"The big question remains what effect this will have on Chinese steel. On one hand, the fall in imports could be interpreted as an indicator of a slowdown in steel output. However, our team in China suggests sentiment among Chinese mills is strong; a view backed up by Steel Business Briefing's latest Chinese mill survey, in which 48% of mills thought their production would rise in Q2 over Q1, while only 4% expect a drop. Furthermore, we believe that ore inventories at many Chinese mills are lower than the norm, while recent weeks have seen a fall in port stockpiles below 1.6 months of imports.
"Therefore, we expect continued efforts to maximise production from the high cost domestic ore mines in the near term (particularly if the self-defeating recent statements from CISA and CCCMC regarding import controls are actually put into practice). However, it seems many mine operators are still wary of the potential short-term nature of current price levels, and are unwilling to invest further in expansions over and above current operating levels.
"When coupled with the imminent end of the Indian peak export season, it seems certain that Chinese mills will seek to restock strongly in the near term. With queues outside the Australian ore ports back at December levels (when exports peaked), it seems as though a degree of response is forthcoming from the seaborne market. However, ex-China demand shows no signs of letting up, while steel prices are rising rapidly - WSD suggests the world export HRC price has now risen to $730/t. This will keep the fire in the belly of the current spot ore price momentum, with further short-term upside seeming probable. However, we reiterate our view that, when the growth momentum in steel slows, despite the high cost support level (>$120/t) from domestic mines, the iron ore fundamentals will struggle to justify current spot prices."  [20/04/10]


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