The price of iron ore weakened on Friday $122.40 a tonne after bouncing off a seven month low of $120 a tonne earlier in February.
The steelmaking raw material remains down 8.8% since the start of the year according to data supplied by The Steel Index (TSI).
The softening in the price this year comes despite China’s steelmakers importing a record 86.84 million tonnes in January, up 18% on December and more than 21 million tonnes higher than January 2013.
The latest China Iron & Steel Association data showed output at the country’s blast furnaces fell to under 1.96 million tonnes per day from last year’s torrid pace which peaked at 2.21 million tonnes. China is responsible for 48% of global steel output.
Steelmakers are cutting back on production as Shanghai rebar futures – the most actively traded steel future – fall to near record lows.
Given the mismatch, stockpiles at the country’s major ports keep growing, topping 107 million tonnes last week, the highest level since researcher Mysteel began compiling the data in March 2010.
Official news agency Xinhua put the figure at just under 100 million tonnes at the 25 largest ports, a whopping 8.1% rise in the space of a week.
The stockpiled iron ore is not being put to industrial use, but because of tight credit conditions inside China the ore is being used as collateral to secure loans.
About 40% of the iron ore at China’s ports are part of finance deals, Mysteel Research estimates.
“The risk comes when metal prices fall by a large magnitude within a short time, driving down the value of the collateral,” Yang Changhua, a researcher with Beijing Antaike Information Development Co., tells Bloomberg:
Borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further
"Borrowers, forced by their bankers to repay loans or to top up collateral, will have to sell the metals, sinking market prices even further and begetting a vicious cycle."
As part of an antipollution drive, Chinese authorities are cracking down on the country’s steel industry which has for years been beset by overproduction and lack of profitability.
One business paper describes lending to China’s steel industry as a "black hole" and the deteriorating situation has led to at least one high-profile collapse.
Earlier this month Xiao Jiashou, known as the king of steel trading in the nation’s financial capital Shanghai has had his assets in a steelmaker frozen due to non-performing loans.
Xinhua reports about one-third of China’s 200,000 steel trading firms could collapse as the loan crisis deepens. Loans to the industry peaked around 200 billion yuan or nearly $33 billion following China’s economic stimulus program in 2008 following the global financial crisis.
The growing number of lawsuits against steel traders have exposed flaws in the almost $600 billion government plan.
"Steel traders went on a borrowing binge between 2009 and 2011 fuelled by the stimulus. Then a lot of them used the loans to invest in real estate and the stock market," Liu Xinwei, a steel industry analyst with Shandong-based consultancy Sublime China Information, told the Global Times last week.
The high inventories may bring about a period of destocking, something which happened in 2012 and led to massive volatility and a $60 a tonne crash in the price over not much more than a month of trading to a low of $87 a tonne.
This process seems to be already under way with a Tianjin-based trader telling Reuters: "There’s no urgency for them [steel mills] to book vessels or future cargoes because there’s a lot of available material at the ports."
Compared to 2011 and 2012 the market was uncommonly stable last year, particularly in the second half with the steelmaking ingredient trading between $130 and $140 a tonne for 148 days straight.