Effective new measure from Chinese government for iron ore producers

In the beginning of April, the price of 62 percent Fe content iron ore declined to the lowest level recorded in the last 10 years. This week iron ore prices have been relatively quiet, while critical price have continued to exert an impact on the global steel market.

Moreover, these critical price levels of iron ore have put an additional pressure on the small producers in the global markets. In fact, an iron ore producer in Canada’s Labrador City has announced that it canceled the labor contract of 150 employees as iron ore prices are expected to continue their downtrend. Meanwhile Australian iron ore producer Atlas Iron Ore has announced that it has planned to cut its production gradually throughout April and then put an end to its export activities.

Additionally, the China Iron and Steel Association (CISA) has published a report recently, saying that despite the rising iron ore supply in the global markets, no improvement in local Chinese iron ore prices is expected due to insufficient demand in the market. Although Chinese government has announced China’s national economic growth target as seven percent, the lowest level since 2009 and a series of stimulus packages to prevent the declines in the housing sector, one of the most important factors that depress the economical growth, CISA officials believe that these measures will not be sufficient for an improvement in iron ore prices.

Meanwhile, market players were wondering if Chinese government will make a move to protect local iron ore producers which stayed out of the race due to decreasing iron ore prices. This issue came to a conclusion when iron ore prices decreased. China’s State Council decided on April 8 at an executive meeting presided over by Premier Li Keqiang to cut the resource tax on iron ore by half from 80 percent to 40 percent, effective from May 1 this year. The 80 percent of resource tax was one of the highest resource tax rates among other countries. In fact, in Australia, which has 35 percent of share in global iron ore production of 2 billion metric tons in 2014, the government applies only eight percent of duty on iron ore production. Looking at the current situation of global iron ore market; the main reasons for the sharp price declines were the low-cost iron ore investments by major producers, China’s economic slowdown, the measures in order to decrease China’s steel production capacity, the strengthening of US dollar against the Australian dollar and the Brazilian real which supported Brazilian and Australian iron ore producers to have the change to keep their profit margins when decreasing their iron ore export prices. Thus, looking at the general situation, the reduction of the resource tax from 80 percent to 40 percent is giving hope to some market players, but providing no solution for above mentioned main reasons and is not expected to avoid new declines of iron ore prices.

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