Wednesday, August 8, 2012

China's industries need to come to grips with slower growth

Weakness in China's economic growth continues to be reflected in iron ore inventories and prices.
People's Daily: - Iron ore stockpiles continued to build up at 25 major ports during the week ending on Aug. 6 despite signs of stabilizing prices, according to Xinhua's latest iron ore price report released on Tuesday.

Inventories of imported iron ore at the ports stood at 98.76 million metric tons, up by 420,000 metric tons week on week.
This inventory build is pressuring iron ore and steel prices in China.
Reuters: - China's steel futures slipped for a fourth day in six on Wednesday, dogged by sluggish demand that is keeping pressure on spot prices of raw material iron ore, with both commodities likely to see more weakness before any recovery begins.

Down more than 16 percent this year, iron ore is wallowing near its cheapest in 2-1/2 years as Chinese steel mills, the world's biggest buyers of iron ore, limit spot purchases until steel prices rebound significantly.
In fact spot prices for iron ore hit a new recent low this morning.

China import Iron Ore Fines 62% Fe spot (CFR Tianjin port) USD/metric tonne
(source: Bloomberg)

The weakness has already translated into shrinking profits in the somewhat bloated steel industry. But these price declines do not necessarily tell us that there is poor demand for iron ore/steel. They simply indicate that orders across multiple industries in China need to adjust down, as companies and municipalities come to grips with significantly slower growth going forward. That adjustment has not yet taken place.
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