Australia's Atlas Says China Iron Ore Demand Falling

Australia's newest iron ore producer has decided to sell its output on China's spot market after failing to tie up long-term contracts, the firm said on Monday, underlining a dramatic contraction in China's ore demand.

The announcement by Atlas Iron Ltd, which is beginning production of the first ores from its Pardoo lode in west Australia, is the latest signal from an Australian mining company that the commodities boom is cracking.

Atlas managing director David Flanagan said an initial 65,000 tons of ore - of a planned production run of 1 million tons over the first year - would be sold on China's spot market, where prices have tumbled in recent weeks on oversupply worries.

"We expect to sign a long-term contract soon, but right now we don't have one," Flanagan told Reuters.

The Perth-based miner is one of a handful of start-ups seeking to ship ore to China from smaller deposits in the vast Australian outback, until recently the exclusive domain of sector majors Rio Tinto Ltd/Plc and BHP Billiton Ltd/Plc

On Monday, Atlas shares dropped as much as a third to A$0.74 before recouping some losses. The stock was trading down 20% at A$0.88 by 05.08 GMT against a 4% rise in the wider market

Mine expansion rethinks

A lengthy downturn in iron ore prices will probably prompt output cuts and prompt BHP and Rio Tinto and others to rethink new projects, CLSA Asia Pacific analyst Matthew Whittall said.

"Most mining companies would be concerned about expanding too rapidly, so we will see a number of companies, possibly including BHP and Rio, revisiting their expansion plans," he said.

Rio Tinto and BHP have earmarked more than $1bn each to expand iron ore output to 320 million tons and 200 million tons respectively in the next year or so, with more mines on the drawing boards.

A larger-than-expected 1.1% slip in China's second quarter GDP growth, to 9%, should further pressure Australian miners to slow down to match weaker demand and allow time for mills to use up ore stocks piling up in Chinese ports, said DJ Carmichael & Co analyst James Wilson.

"Right now a priority must be to clear a 68-million-ton glut of iron ore sitting in Chinese ports," Wilson said. "That could take the Chinese about eight weeks to chew through."

Atlas, which has been awaiting final clearance to start mining since August, was close to clinching sales pacts with buyers and would also stockpile ore until contracts were signed, Flanagan said.

"We are down to a small number of short-listed parties," Flanagan told Reuters. "We expect an outcome shortly. The 65,000-ton shipment will be one quick sale."

This month, steel mills in China asked another Australian miner, Mount Gibson Iron Ltd, to delay some iron ore shipments, seen at the time as the strongest public sign the world's top steel producing country was choking on supplies. Rio chief executive Tom Albanese has already warned that China's economy was "pausing for breath", though Rio has not announced any changes to its shipping schedules.

His counterpart at BHP, Marius Kloppers, is widely expected to give a similar assessment when BHP discloses quarterly production data on Wednesday.

Spot iron ore prices in China have been halved to around $100 a ton on a landed basis, since the highs of $198 a ton in late February, marking a discount against contracted one-year prices expiring 31 March, 2009, according to analysts.

By James Regan.