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Big miners struggle to tame China with iron ore glut

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Plans by the world's top iron ore miners to knock out high-cost rivals with a flood of cheap ore have had some success, but are meeting resistance where they had hoped to make the biggest inroads - in China.

A large number of small, high-cost Chinese mines have been forced to shut by a collapse in global prices but, overall, domestic output is increasing as the big state-backed producers expand or consolidate.

"Those mines that belong to steel mills or to central government enterprises - and those that were constructed relatively early and where resources are good - all have room for survival," said Lian Minjie, general manager of Sinosteel Mining, a subsidiary of one of China's biggest state trading firms, at an industry conference this month.

After rapid expansion, global miners such as Rio Tinto and BHP Billiton had expected swathes of high-cost Chinese iron ore capacity to shut, helping to arrest a price decline of around 40 percent this year.

Read MoreRio Tinto profit jumps 21%; CEO says: 'We have overachieved'

Iron ore ended last week at $81.70 a ton and Li Xinchuang, deputy secretary general of the China Iron and Steel Association, told a conference on Monday it could hover around $80 over the long term. Morgan Stanley has forecast a drop to $70 before a rally to $90 by year-end.

Rio Tinto said this month it expected 125 million tons of capacity to be taken out around the world in 2014 and that 85 million tons had already been cut, notably in China, Indonesia, Iran, South Africa and Australia.

Even so, output in China in the first eight months of 2014 rose 8.5 percent from a year before to a record 986 million tons, according to the National Bureau of Statistics.

"Many mines aren't closing down because they are part of the production chain of the big steel mills and they are usually located quite close to the steel production facilities," said a manager with a private iron ore producer in southern China's Hainan province.

Among China's top steel firms, only Baosteel, the second biggest, does not own domestic iron ore mines.

Hebei Iron and Steel Group, China's biggest producer, has four, third-biggest Wuhan Iron and Steel Group owns six, Anshan Iron and Steel Group (Angang) has nine and Shougang Group as many as 12.

None of the firms would comment on their iron ore output.

Mines owned by steel mills are largely protected from market forces, their figures invisible in the steel company accounts. State-owned firms are also obliged to protect jobs, so they are encouraged to continue operations even when making losses.

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According to a study by the China Iron and Steel Association (CISA), iron ore production at more than 20 major mines owned by steel mills remained relatively stable throughout 2013 despite fluctuating prices.

Consolidation

By failing to adjust for grades, China's raw production figures can be misleading. One industry estimate suggests the average iron content of Chinese ores fell to 21.5 percent from 31.2 percent between 2003 and 2013, leaving it far lower than the 60 percent or more on offer from overseas suppliers.

Analysts suggest a far better indicator of the health of Chinese producers is utilization rates, which according to some estimates have fallen to around a third at some mines this year.

The steadily rising share of imported ore being used by steel mills is another key indicator. A survey by consultancy Mysteel shows the share of foreign ores used in steel production rose from 75 percent at the start of 2014 to 88 percent by mid-September.

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But regional breakdowns suggest the collapse in prices has helped drive consolidation and served to eliminate production in regions where smaller private producers predominate, including Chaoyang in northern Liaoning province.

"At least two-thirds of mines in Chaoyang have already stopped producing and there aren't many that are capable of continuing," Zhang Lu, head of a privately owned mine there called North Piaobaolai, told a recent conference.

Conversely, many bigger iron-ore regions such as Hubei, home of Wuhan Iron and Steel, as well as Sichuan, Guangdong and Anhui have all seen double-digit production increases this year.

In the top producing region, Hebei, iron ore output rose 3.1 percent to 363 million tons in the first eight months of 2014, making up 36.8 percent of the total.

Read MoreIron ore glut: Are shutdowns the only way out?

Consolidation may have helped reduce average costs. Deutsche Bank, citing data from the Metallurgical Mines Association of China, said costs had fallen 5-10 percent by June from a year before.

Grades and production costs also vary widely, which has kept some miners profitable. Research by Zhu Jinlong, an analyst with the CISA-affiliated Custeel, shows the cost per ton in shallow, open-pit operations in the northeast stands at 60-80 yuan per ton, half the cost of deeper mines elsewhere.

"Mines in some regions have been operating at cost or even with losses, and have been forced to cut or stop production (but) mines in other regions are still profitable and they remain enthusiastic to produce," he said.