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Source: Reuters

INTERVIEW-China's ore import surge reflects demand - Hebei port

Published: 12 Mar 2010 05:42:01 PST

* High port iron ore inventories reflect demand and prices

* Hebei Port Group working on Shanghai listing

* Expansion ongoing, but fears "disordered" competition

BEIJING, March 12 - Growing demand and spiking prices are behind a surge in iron ore stockpiles at China's ports, rather than underlying structural problems in the steel sector, the head of the Hebei Port Group said.

"From the perspective of the ports, the high inventories are partly down to prices and for the most part down to supply and demand," company president Huang Jianhua said on the sidelines of China's latest session of parliament on Friday.

Licensed importers in China -- including the steel mills themselves -- have long been able to profit by buying cheaper iron ore on a benchmark price basis and then selling it on the domestic market, where spot market prices are usually much higher.

Critics of the dual-pricing system, including the China Iron and Steel Association, say it has created perverse incentives for mills and traders to import far more ore than they need, thereby pushing prices up to levels the market cannot actually support and leading to unsustainable increases in inventories.

In late 2008, spot market prices fell below the benchmark as a result of a global economic downturn, and much of the ore delivered to China on a contractual basis was then left to languish at its ports, where stockpiles have remained at more than 65 million tonnes ever since.

Dealers expected the inventories to finally drop when the spot market price recovered to around $120 a tonne -- the benchmark price level of 2008.

But although spot prices are now at around $140, the port stocks have continued to rise, hitting 71.71 million tonnes this week, according to figures from industry consultancy Mysteel.

Huang said iron ore inventories at the company's three Hebei ports were "very concentrated" right now, with traders waiting to make a profit from an inevitable increase in benchmark prices, possibly as early as April.

But demand -- rather than arbitrage opportunities on the China market -- was still the key factor, he said.

"You need to understand that the inventories are dynamic, not fixed," he said, explaining that none of the ore now at the ports was priced at the exceptionally high 2008 benchmark.

"Why is the imported volume still so high? It is because the overall trend for prices is heading upwards. We are now at the end of the trading year and so the volume of imported ore is bound to increase. If prices were falling then the volume of imports would certainly fall."

He said the throughput of both iron ore and coal through the company's three main ports -- Qinhuangdao, Caofeidian and Cangzhou -- was likely to rise by around 20 percent this year.

SHANGHAI LISTING

Huang said the Hebei Port Group will list in Shanghai as part of a long-term restructuring plan that will also include the introduction of strategic foreign investors, Huang said.

"Because we are a very important port within China, we are planning to list on the main A-share market of Shanghai."

He did not give a specific timetable for the listing, but according to local media reports, the company is planning to raise 5 billion yuan ($732.5 million) in capital within the year.

The assets being listed will include the infrastructure at Qinhuangdao, which is China's biggest coal port, as well as other new projects, said.

He said in the next stage of the company's development it aims to enter into partnerships with big overseas exporters seeking to invest in speciality berths.

Hebei's ports are also in the process of expansion alongside many others in the region. Huang said close attention was being paid by the company, the government and China's port industry association to the possibility of "excessive" and "disorderly" competition in the sector.

"We need to avoid disordered expansion," he said. "Port construction needs to be done in accordance with market demand, and the various ports also need to be coherent and make sure their overall layout is healthy," he said.

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