China’s Slowdown Hits Price of Iron Ore

   < < Go Back
from The Wall Street Journal,

Sluggish Demand, Falling Commodity Prices Reduce Government Tax Revenue and Affect Currency Values.

China’s hunger for minerals to build skyscrapers, cars and bridges produced a decadelong surge in the price and production of key commodities.

Now, exporting nations are feeling the hit as the China-fueled boom slows.

Topping the list are big commodity players Australia and Brazil, but also resource-rich countries, such as Guinea, Indonesia and Mongolia, where minerals make up a disproportionate share of the economy and employment.

In countries specializing in crucial commodities, such as iron ore and coal, sluggish demand and falling commodity prices are reducing government tax revenue, increasing trade deficits and affecting currency values.

The Australian dollar reached a four-year low in November against the U.S. dollar due in part to sliding raw-material prices and slowing Chinese demand growth for those commodities.

The longer-term impact of a collapse in commodity prices could be even more profound, hurting the economies of producing countries and boosting buying power in Western consumer economies.

“The impact of oversupply could be a mess,” says Lourenco Goncalves, CEO of Cliffs Natural Resources Inc., a midsize miner that laid off workers in Australia.

Meanwhile, the biggest mining companies say they are still committed to plans to keep topping production records. Rio Tinto PLC and BHP Billiton Ltd. have been shipping cargoes from Australia’s remote northwest at record rates.

At this point, no country can absorb China’s slack, although executives at mining companies, such as BHP Billiton, hope India may help absorb new production. Still, China is expected to set the tone for the next decade.

No commodity has been as China-dependent as iron ore, and for good reason: China makes half of the world’s steel, and 98% of iron ore goes into steel production. China imports two-thirds of the 1.2 billion tons of iron ore traded annually on seaborne markets.

Far more countries have come to feed at the China trough: In 2003, eight nations exported more than 10 million tons of iron ore. Last year, nearly twice as many—15 countries—did so.

Australia, the world’s top iron-ore exporter, sends 80% of its iron ore—worth $67 billion last year—to China, and Brazil sends half its production of the mineral there.

More From The Wall Street Journal (subscription required):