Another sign of the Chinese muddling in commodities has emerged when it was known that Chinese imports of Iron ore exceeds the demand by 50 million tons for this year.  Speculation (and accumulation of commodities) both by Chinese State authorities and Chinese private actors trying to front-run the expected recovery has brought up an excess of iron ore on the market, thus allowing no room for further upward evolution in iron ore prices.

China’s iron ore imports have exceeded actual demand by about 50 million tonnes so far this year and the oversupply leaves no room for further price rises, a senior official of the China Iron and Steel Association (CISA) said on Monday.

“We believe the Chinese iron ore price is largely influenced by speculation on the market,” CISA’s Vice Chairman Luo Bingsheng told reporters at the sideline of an industry conference in Beijing.

China imported 405 million tonnes of iron ore in the first eight months of this year, up 32 percent from a year earlier, to feed its rapidly growing steel output.

The country’s annual capacity is expected to top 700 million tonnes by the end of this year, with production of around 600 million tonnes of crude steel in 2009, hefty growth of 20 percent from the all-time high of 500 million tonnes in 2008.

The benchmark price of Indian origin ore with 63/63.5 percent iron in China has stabilised at about $90 per tonne, below the year’s peak of $115 hit in early August, but still above the contract price of about $75 cost and freight.

Additionally, Luo called for a revision of ongoing annual price talks, which he said would benefit both steel mills and miners, but gave no details.

“The traditional negotiation system no longer matches the current market situation. We think it is necessary to make some changes and adjustments, but they should be decided by both the buy side and the sell side,” Luo told reporters.

China broke the rule this year by agreeing to a 35 percent cut from 2008/09 prices with Australian upstart miner Fortescue Metals Group, despite the top miners’ “take or leave it” approach to the 33 percent price cut first reached by Rio Tinto and Japanese steel mills.

The annual conference involving CISA and the steel industry, led by top producer Baosteel, is traditionally seen as a warmup for annual term talks.

CISA Secretary General Shan Shanghua told Reuters earlier that his group would seek to change contract terms to the calendar year instead of the April-to-March fiscal year.

Shan also said talks over 2009/10 prices were continuing with Brazil’s Vale and Australia’s BHP Billiton six months into the contract year, but added that China was not in talks with Rio Tinto.

As regards overall steel production, whereas steel production fell all over the world Y/Y, in China the production beat its 2008 output (see below graph, courtesy of Steel Grips)

On the whole, the seel production alone would indicate a recovery if there wasn’t a serious issue of overcapacity in China. This overcapacity is forcing some Chinese steel mills to cut prices up to 58 $ per ton.

Despite this, the Chinese stimulus may provide for some nice results in Asian steelmakers.

Asia’s big steelmakers likely saw their earnings exceed expectations in the latest quarter on unexpected strength in China’s economy, though the spectre of oversupply looms as a key threat in the year ahead.

The sector is pulling out of the worst slump in decades thanks to stimulus measures by governments around the world, including China’s near $600 billion package focused on infrastructure that prompted a spurt in exports by JFE (5411.T), Nippon Steel (5401.T) and POSCO (005490.KS) to capture demand.

However, the issue that lies ahead, as previously mentioned is the Chinese oversupply… And there is not going to be a market sufficiently vigorous to catch up all that supply.

But the threat of oversupply from China clouds the outlook at a time when manufacturers are still cautious about spending for new plants, and housing and building starts remain in the doldrums.

Steel output at China has been growing at a rapid clip. The country’s annual capacity is expected to top 700 million tonnes by the end of this year, with production of around 600 million tonnes of crude steel in 2009, a hefty growth of 20 percent from the all-time high of 500 million tonnes in 2008.

Lakshmi Mittal, chairman of the world’s largest steelmaker, Arcelormittal, told the Financial
Times in a recent interview that prospects for a world steel industry rebound could be blown off course by a strong rise in exports from China.