While Australian miners are happy with the strengthening of iron ore prices in the global market, their glee may be short lived. Reports said that in response to iron ore price rising to $158.50 a tonne from a low of $86 in 2012 has prompted Chinese steelmakers to prefer domestic supplies.
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The improvement in iron ore prices has led to an increase in shareprices of mining giants BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO) and Fortescue Metals Group (ASX: FMG), prompting industry observers to ask if the higher prices is an indicator of the return of Australia's mining boom.
In a survey of 60 smaller steel mills in China, Bloomberg reported that use of domestic ore rose to 84.1 per cent of fines used to process it into pellet feed and 28.2 per cent of ore used to produce sinter feed, up from 80.1 per cent and 26.2 per cent, respectively, in the third week of Dec 2012.
Among the Chinese steelmakers that have signified intention to buy more local ore are Jianlong Steel Holdings, the third-largest non-steel mill in China, and Zenith Steel Group. The decision to rely more on local ore is despite China suffering its coldest winter in 28 years which limited local supplies and shuttered China mines.
"Mills are more willing to use domestic ore to tame the rise in raw-materials cost," Bloomberg quoted Xie Yingwu, analyst of Shanghai-based Mysteel.com, China's largest iron and steel researcher.
Mr Xie pointed out that imported iron ore from Australia which is shipped via the northern city of Qianan is $6.43 per tonne more expensive that domestic ore.
Reports of China's economic slowdown, which partly accounts for the dip in prices of the steelmaking ingredient, has led to the Asian giant moving toward the next phase of its development characterised by 7 to 8 per cent growth in domestic consumption.
These developments are clear manifestations that China is not an economic miracle, but a social experiment by the national government to appease and retain control over 1.3 billion Chinese. Thus, while industries such as steel suffer from unhealthy returns, Beijing keeps them due to the jobs it generates.
The Sydney Morning Herald pointed out that Australia's resource boom is definitely not over, but changing. While China's demand for different types of commodities would likely remain bullish for years, escalating prices would be a thing of the past. The daily forecasts that while steel production would remain in the vicinity of 750 million tonnes in the near future, growth rates of 20 per cent would likely be uncertain.
For Aussie miners to remain in business, the newspaper recommends keeping cost base competitive, which is what Aussie miner Crusaders Resources (ASX" CAS) is doing at its Posse Iron ore Project in Brazil by maintaining a low capital cost, being close to infrastructure and making sales at the mine gate to local customers.
Price of iron ore hit a two-year high on Tuesday at $158.50 per tonnes, but dropped 0.2 per cent to $158.20 per tonne on Thursday, according to the Steel Index.
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