The steel industry is about to go from bad to worse.
China, the world's biggest consumer of steel, needs less metal. The Chinese housing market, responsible for using the bulk of steel, is bulging with empty properties.
As a result, the country, also the largest steel producer, is swimming in the metal and exporting more to get rid of it.
"Things are getting worse and I don't see any possibility of a rebound in under three years," said Tim Murray, managing partner with investment adviser J Capital Research Ltd.
"What I have seen actually is a deepening of the crisis."
Although the country is aiming for economic growth of 7.5 per cent – a healthy clip that miners hope will help turn the commodities market around – there are alarming signs China is struggling with the overcapacity in its steel industry.
Last year, China's steel exports jumped 50 per cent. The surge came in the same year that steel consumption eased 3 per cent, according to the World Steel Association.
And that trend is continuing this year. China is on track to export even more than it did in 2014. It is also on track to consume less steel as the country grapples with an excess of residential properties – an overhang that will take a long time to work out.
"Who wants to build more when what you have got to worry about is getting rid of your inventory. And who wants to buy when everything is on sale and probably the prices will go down," said Patrick Chovanec, managing director with Silvercrest Asset Management.
The surplus of steel has had a ripple effect throughout the commodities industry. Iron ore and metallurgical coal, used to make steel, have lost more than 70 per cent of their value over four years. Iron ore once traded at $190 a tonne in 2011 and is now about $60. Likewise, metallurgical coal used to trade around $300 a tonne and is now around $90.
That has led to mine closings and suspensions, including temporary summer shutdowns at Teck Resources Ltd.'s six coal mines in Western Canada.
The fallout has been felt most acutely in the Labrador Trough, a 1,600-kilometre-long iron-ore-rich area that borders Labrador and Quebec. The trough used to be home to three iron-ore mines and a slew of mining startups. Today there is essentially one survivor, Rio Tinto PLC's Iron Ore Company of Canada, which recently laid off around 100 miners.
Rio is one of the world's four biggest iron-ore producers, along with Anglo-Australian BHP Billiton Ltd., Brazil's Vale SA and Australia's Fortescue Metals Group Ltd. Together they spent billions of dollars to expand production and now their iron ore is flooding the market as demand weakens. The glut of iron ore is has forced higher-cost producers to shut down.
Late last year, Cleveland-based Cliffs Natural Resources Inc. closed its Bloom Lake mine in Quebec and another in Wabush, Labrador, putting hundreds of miners out of work. The company is restructuring its Canadian operations under bankruptcy protection. In June, the company cancelled medical benefits for about 1,000 retirees from the Wabush mine. That dealt another blow to the town of Wabush, which was built around the mine and is still reeling from the closing.
"This company is not bankrupt. They are still doing business. They decided not to do it here in Canada any more. You don't get to walk away from legal, negotiated contracts. Time for our government to step in and say 'No, no, you can't do that here,'" said Ron Barron, who worked at the Wabush mine for 30 years.
The Canadian government offered retraining for miners who lost their jobs, but many could not afford to attend. "You can't pay your mortgages on unemployment," Mr. Barron said.
Other companies in the Labrador Trough that haven't shuttered operations are changing course. Century Iron Mines Corp. has decided to put its flagship iron ore project on the back burner while it waits for the markets to recover. The company, whose two key investors are state-owned Chinese enterprises, is now looking for a metal acquisition.
The closed iron ore mines will have a difficult time reopening. Canadian mines are at a huge disadvantage to Australia, which is much closer to China.
"In terms of competing into the Chinese market, I think they've got no hope of ever restarting because they are just not going to be cost competitive," said Paul Gray, research director of iron ore with commodities firm Wood Mackenzie. "Unless there is a source of demand closer to home, in Canada or the U.S., it is hard to see how they would be viable."