Cash-strapped Chinese steel mills are dumping iron ore stocks, selling at a loss to shore up cash flow in the latest sign of the sector’s worsening crisis, steel mill and trade sources said.
The sale of port inventories is deepening a rout in iron ore prices which have already tumbled 25% over the past two months as the sector struggles with overcapacity, falling demand for steel from real estate to shipbuilding, and tight credit, Reuters reported.
This week, prices for the raw material hit their lowest in a decade at $40.30 a ton, while futures contracts fell to record lows of $33 a ton for 2016. Shanghai rebar steel prices also sank to all-time lows.
“The market declines have been accelerated by steel mills who are selling iron ore at low prices because they are short of cash,” said an iron ore trader in Beijing.
Steel mills are facing a cash crunch after authorities urged banks to cut credit to oversupplied industries, with privately owned mills hardest hit. Tangshan Songting Iron & Steel, one of the country’s big privately owned steel mills, last month closed its doors, but others are desperate to hang on.
Mills with long-term supply contracts with big miners have already cut stockpiles of the steelmaking raw material at their factories to a minimum, preferring to buy hand to mouth due to shaky downstream demand and to minimize cash use.
Now, loss-making mills are resorting to selling iron ore bought with letters of credit in a last-ditch effort to maintain cash flow for production as they seek to repay bank loans, many due at yearend, four traders and steel mill executives said.
Mills that survive will try to get new credit facilities for next year, they said.
In Tangshan, in China’s top steel producing Hebei province, mills started offloading stock last month, an iron ore sales executive at a private steel mill there said.
“More mills, in more regions, are doing the same now, only to collect cash flow to survive and they don’t care much about prices,” he said.
Selling is also being spurred by the relentless fall in prices, as factories seek to reduce their exposure to further losses, he said.
Di Wang, analyst at CRU in Beijing, cautioned the selling could last into the new year as steel producers prepare for another round of painful output cuts as the outlook for orders looks bleak.
“Steelmakers will still sell their iron ore stocks before the February Chinese Spring Festival because there are also expectations of further production cuts,” Wang said.
There is no estimate of how much iron ore mills have sold, but port inventories have kept rising, implying that appetite is weakening as steel mills step up output cuts.
Mills have previously sold iron ore when prices rose to make a profit, or to balance their raw material needs with orders.
