China set to introduce iron ore subsidy

China may introduce a nationwide subsidy for local iron ore producers amid slumping prices, according to the official Shanghai Securities News.

The subsidy may start as soon as the middle of this month, the newspaper reported on Wednesday, citing people in the industry that it didn’t identify. Telephone calls by Bloomberg to the media office at China’s finance ministry weren’t answered.

The introduction of a subsidy by the world’s largest steelmaker may further hurt prices that fell to a 10-year low last week, according to Shenhua Futures Co.

The rout has left higher-cost producers in China and overseas making losses, threatening mine closures and redundancies. China is the top purchaser of seaborne ore, buying to supplement local output.

“The subsidies, if implemented, will sustain domestic production, increase the global supply of iron ore and result in prices slumping further,” Wu Zhili, an analyst at Shenhua Futures in Shenzhen, told Bloomberg by phone, commenting on the newspaper’s report. Local mines account for about 20% of China’s iron ore demand, according to Wu.

Two versions of the subsidy are under consideration, the report said. Payments may be pegged to the ore’s grade, with producers of lower-quality output receiving bigger payments, or there may be a figure of six yuan (about R12) a ton, it said.

Ore with 62% content at Qingdao was at $48.06 a dry ton on Tuesday, according to Metal Bulletin. Prices fell to $47.08 on April 2, the lowest level since 2005, based on daily and weekly data from Metal Bulletin and annual benchmarks for ore delivered to China compiled by Clarkson, the world’s largest ship-broker. Prices lost 33% this year.

Chinese mills, which buy about two-thirds of seaborne ore, were encouraged to acquire mines at home and overseas to secure supplies after a surge in output in the past decade, when double-digit economic growth pushed up raw material demand.

“China’s steel industry is one of the industries that receives subsidies from the government because of its massive scale,” said Wu. “Many of China’s iron ore mines are state-owned, so it’s natural for the government to support them.”

Iron ore prices collapsed when the biggest suppliers, including BHP Billiton and Rio Tinto Group, increased output into a saturated market, seeking to reduce unit costs and preserve or expand their market share.

China’s apparent steel demand fell about 5% in the past six months from a year earlier, the biggest drop since the global financial crisis, Goldman Sachs Group said on April 6.

Global iron ore demand will shrink this year, according to Deutsche Bank AG. Prices will average $51 a ton this year and may dip below $40, the bank said in a report last month. – © 2015 Bloomberg News

With assistance from Jasmine Ng in Singapore

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