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India's Third Giant Leap

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Biggest downside to commodity prices
Fri, 30 Sep Pre-Open

China accounts for nearly 45% of world steel production. Iron ore is one of the main raw materials used for making steel. Hence China requires huge quantities of iron ore. But China faces shortage of iron ore reserves. China's domestic iron ore is of lower quality and is produced through a large number of smaller mines. With rising steel production, domestic iron ore production is not enough to satisfy the demand. Hence, China's reliance on imports has increased significantly over the years. So much so that they have started to import from countries like Iran and Indonesia, apart from their traditional importing partners like Australia, India and Brazil. With increased demand for iron ore, the prices of iron ore have gone up significantly. In a similar manner, China's gargantuan need for commodities has spurred a rally in their prices over the past few years. But things are about to change.

China has been investing overseas in a bid to reduce iron ore imports and break the dominance of three major global miners, Vale SA, Rio Tinto and BHP Billiton that controlled 62% of the world's seaborne iron ore market in 2010. China has acquired overseas mining rights capable of producing 150 m tones of iron ore annually, but most of the mines have yet to start production. In 2010 only 60 m tones of imported iron ore came from mines that had Chinese investments. China Iron and Steel Association (CISA) have urged Chinese companies to increase imports from Chinese invested resources. In fact Chinese companies like Baosteel and Shougang have already started to develop iron ore mines in Africa.

The Chinese steel industry has set a target to achieve a self sufficiency ratio of domestic iron ore at more than 50%. If this happens then global demand and supply situation for iron ore may reverse in the near future. Currently there is a global shortage of iron ore. As a result many Chinese and global companies have started investing heavily in mining activities, which has led to huge production expansion. Now if the import demand from China shrinks, the oversupply scenario could lead to a reversal in commodity prices.

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