'Big Three' Iron Ore Miners Consolidate Chinese Import Market, Squeeze Higher-Cost Producers

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The "Big Three" ore mining companies seem to be having success in their drive to displace China's domestic iron ore output.

The 50% drop in iron ore prices in 2014 initially was seen as directly linked to China's tapering growth rate and a resulting fall in demand.

But China has seen a sharp rise in iron ore imports, reaching a peak of 86.85 million tonnes in December 2014. This brought the total for the year to 932.5 million tonnes, a gain of 13.8% over the 2013 total. The gain is reported to have nothing to do with either an increase in steel production or inventory build-up in China.

The jump in iron ore imports is not because China is producing more steel. Output of crude steel rose only 1.9% in the first 11 months of 2014 from the same period in 2013. Neither is it because major stocks of iron ore are being built up in warehouses, with inventories standing at 99.85 million tonnes in the second week of 2015.

The most logical explanation offered for the prevailing market conditions is that imports from the "Big Three"--Vale (NYSE:VALE) (Rio de Janeiro, Brazil), Rio Tinto plc (NYSE:RIO) (London, England) and BHP Billiton plc (NYSE:BHP) (Melbourne, Australia)--have been displacing more costly domestic iron ore production in China. This has been the strategy of the companies, who have repeatedly argued that the ultimate impact of the massive expansions of their lower-cost mines would be to force high-cost producers to leave the market.

The gap between the increase in China's iron ore imports and the gain in its steel output is about 11%, suggesting that just more than 100 million tonnes of Chinese domestic iron ore output has been displaced by imports.

The ore supplies to China are being consolidated in favor of the Big Three, which backs their strategy of finding outlets by eliminating competition, and making profit by increasing turnover and better economies of scale.

The Saudi Arabian oil producers must be eyeing the iron ore market with keen interest, as they maintain levels of crude output and meet lower prices in the market with a view to consolidating their grip on traditional markets and squeezing out the competition, whose pockets are not so deep and resource reserves are not so huge.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.