China steel output seen shrinking 20%

Both iron ore and Brent crude oil have nearly halved in the past 12 months, by 48.3 and 47.1 per cent respectively.

Prior to 2013, iron ore miners hardly mentioned their production costs - not surprisingly when they were receiving US$130 a tonne and higher for their product.

The Chinese steel industry has more than doubled capacity since 2006 from under 500m tonnes to over 1.15bn tonnes today.

Meanwhile, the Xinhua-China Iron Ore Price Index for imported iron ore with 58 percent iron content was at 48 points on the date in question, also down three points week on week. The falling price was due to a couple of reasons. That saw massive amounts of supply come on stream. Chinese steel production grew just 4% in 2012, after a number of solid years of double-digit growth. Steel demand had waned too, impacting on steel prices, pushing them lower.

Now Chinese steel mills, which have gorged on ever cheaper iron ore in the past two years, face a far more intractable problem. Rather than shutting down loss-making production, the Chinese state is subsidising the losses. The Chilean September crude steel production soared higher by 24.5% from 76,000 tonnes in September '14 to 95,000 tonnes in September this year. The country is the lynchpin of the global industry, accounting for half of worldwide production. Earlier this week, South Korea's biggest steelmaker, Posco, reported a quarterly loss of US$582 million.

China said earlier this year that it aimed to cut as much as 80 million tonnes of steel capacity in the next three years.

China's steel industry, the largest in the world, is bleeding cash and every producer is feeling the pain, according to the head of the country's second-largest mill by output, which raised the prospect that nationwide production may shrink 20%. "The sector is facing increasing pressure on funding as banks have been tightening lending to the sector - both loans and the financing provided for steel and raw material stockpiles".

Motley Fool contributor Mike King doesn't own shares in any companies mentioned.