New Delhi: China, reputed to be the world’s toughest bargainer when it comes to iron ore deals, isn’t best pleased about the scrutiny over illegal mining in Goa, which has resulted in trade slowing. Watching every development in India is Helen Liu, a senior analyst at the Umetal Research Centre, a Beijing-based information provider on metals, whose reports are highly regarded in the steel and iron ore market.

Monitoring supply: Liu says she hopes the situation in India can be sorted out as soon as possible.

Liu spoke in an interview about how the shadow over Goa’s mining industry—which supplies 45 million tonnes (mt) of low-grade, powdery iron ore fines every year to China to be blended with high-grade ore from Australia and Brazil—is changing the dynamics of the trade. Edited excerpts:

How has the drop in Indian iron ore export affected Chinese steel mills?

India is the third largest iron ore exporter to China, and the fall in iron ore supply has partly led to the tightened supply of iron ore in China, pushing up bid prices for iron ore, including that from Australia and Brazil. As a result, the steel-producing cost of mills has increased. The slowdown in the Chinese economy coupled with the steel downstream industries’ cool down, has weakened the steel industry.

According to the data complied by Umetal, many medium- and small-size steel makers are operating in the red. During the first nine months of this year, the profit margin of China’s major steel makers was only 2.98%. So, in the past two months, production cutbacks have been spreading across the country.

Will China easily find replacements for Goan iron ore fines if mining is banned in the state? Which countries can supply fines that are equivalent to Goan fines?

As we know, Goa mostly exports low-grade ore and Chinese steel makers have a demand for low-grade ore so as to lower producing cost. But they can also source low-grade ore from Australia, such as Yandi fines, Robe river fines and Rocket fines. The price gap between Goa fines and similar Australian fines is $10-plus per tonne, with the latter being on the higher side.

What is your forecast for crude steel production in China in 2011 and 2012?

Last year, Chinese crude steel output was 626.7 mt with a year-on-year growth of 9.3%. We forecast it would be 692mt this whole year, up by about 10%, and for 2012, total crude steel output would be 730 mt. Though some steel companies are going in the red, in China it is hard for them to cut production by a large scale as they also do not want to give up their marketshare easily unless there is a severe financial crisis.

Who will consume 730 mt of Chinese steel in 2012?

Steel exports will be less than 10% of the 730 mt, and the rest is for the domestic market. The steel demand mainly comes from two parts—construction (real estate, railway construction, infrastructure) and industry production (machinery industry, automobile, shipbuilding, home appliances).

Is India a good market for steel? How much steel can China sell to India this year and the next?

For China, India is a market with great potential, as the Indian economy will develop rapidly in the next few years and has to improve its infrastructure, which could bring great demand for steel. However, there is one thing we should note—India has also been developing its domestic steel industry.

So the quantity of steel imports from China to India will depend on its domestic steel demand and steel production capacity. Last year, China exported 3.38 mt of steel to India, and this year up to now, it is 1.8 mt or so. We forecast it will be at 2.3-2.4 mt for all of 2011. Next year, there will be no big change.

What is your forecast for iron ore prices in 2011 and 2012?

According to Umetal data, the Chinese iron ore import price on average in the first nine months of this year was $165 per tonne with freight and insurance (CFR). Considering the slowdown in the economy and related industries, we forecast the iron ore import price for the whole of 2011 may be $155 per tonne, and for 2012 it would be around $140 per tonne.

What is the future of the iron ore market? And where do you see India-China trade relations in this sector?

The global iron ore production capacity has been expanding greatly and we have to think about the turning point of iron ore supply-demand. Like I said, India is the third largest iron ore exporter to China and it is very important to us; we have no reason to say no to it, we only hope the current situation can be sorted out as soon as possible. Certainly, every coin has two sides, so the regulation might help build a healthy market and keep with sustainable development as well.

Frankly, as to the problem in the Goa mining industry, I think what I know is just prima facie. I hope the Indian government can bring some proper guidelines to this industry. After all, the Indian steel industry needs high-grade iron ore with iron content of 60%-plus, and China needs low-grade iron ore, and both can benefit from a healthy mining sector. India is a very important market for China, and we should enhance our cooperation and friendship, including sharing information about the whole industry.