Inefficient Chinese steel mills put on notice

The price of iron ore fell to an 18-month low as China signalled that it would cut off credit to inefficient steel mills to encourage rationalisation.

The ABC’s PM reported yesterday that Shang Fulin, chairman of the China Banking Regulatory Commission, said that underperforming factories were on notice as the country tries to encourage more sustainable growth.

"We'll take measures with over-producing and backward industries,” PM reports him as saying.

“We'll encourage them to merge, to reorganise or even close down… And, using our methods, some of them will actually increase efficiency."

The slowing Chinese economy has pulled the price of iron ore down. The world’s second-largest economy represents 60 per cent of the total global consumption of the commodity.

The Steel Index yesterday showed iron ore priced at $US 104.70 per tonne.

The effect of the price slump is expected to be felt most keenly at smaller, high-cost miners, reports Reuters, with larger players better placed to survive the difficulties.

"This will impact our organisation much less than other Western Australia producers," Jimmy Wilson, head of iron or at BHP Billiton, said yesterday.

Wilson’s counterpart at Rio Tinto, Andrew Harding, said he expected there to be volatility in the short-term, but a solid future for iron ore.

"The longer term is still intact and I can't see any indication that would change my mind, we still see good growth in the market through to the 2020s,” he told the ABC.

The fall in prices will have a significant effect on the federal budget in May, with Chris Richardson, director at Deloitte-Access Economics, putting this at $300m per year in lost tax revenues for a sustained drop of $US 1 per tonne.

"This fall of around $US9 we’ve seen would mean a loss of more than $2.5 billion a year in tax, if we assume one-third of Australia’s iron ore revenue is ultimately paid to the federal government," he told The Australian.

Image: Reuters