The seaborne iron ore market is currently characterized by a massive oversupply. Production also keeps being further expanded despite the low prices, which will doubtless prevent prices from recovering for the time being. The iron ore price is only likely to stabilize if significant production capacities are shut down, Commerzbank said in a report.
The iron ore price has been on a downward trajectory for almost the entire time since December 2013. After plunging by 47% last year, the price has already shed a further 13% since the beginning of the new year. At $61.2 per ton, it fell in early February to its lowest level since the data series started in May 2009.
The massive increase in supply is to blame for the pronounced price slump: because the iron ore price was trading more or less permanently above $120 per ton from 2010 until the beginning of 2014, substantial investment was made to expand existing and open new mines. The resulting new supply naturally made its way onto the world market. According to the Brazilian producer Vale, 234 million tons of iron ore have been added to the seaborne market in the last two years alone, with another 196 million tons to be added by 2020. The lion’s share of the increased supply comes from Australia and Brazil. Consequently, global trading in iron ore – which could reach a volume of 1.4 billion tons in 2015 according to Australia’s state Bureau of Resources and Energy Economics (BREE) – will continue to grow considerably.
The companies which have significantly scaled up and indeed are continuing to expand production are Vale, Rio Tinto and BHP Billiton, collectively known as the “big three”. One characteristic shared by these three companies is their very low production costs. By its own account, Rio Tinto’s production costs for iron ore destined for China amount to $40 per ton and are set to decrease to a good $35 per ton by the year 2020. BHP Billiton’s production costs are only marginally higher. The depreciation of the Australian dollar and Brazilian real is already benefiting the producers in the short term – the real is weaker than it has been at any time since 2004. The massive slump in oil prices and the low freight rates (the Baltic Dry Index has dropped to a record low) have likewise eased the cost basis.
It is hardly surprising then that producers have begun to engage in cut-throat competition. By expanding supply, the major iron ore producers are now successfully forcing smaller competitors and those with high production costs out of the market. Inefficient mines have also been shut down in China of late – production costs there are roughly $75-145 per ton, according to an earlier appraisal of the National Development and Reform Commission. As a general rule, many Chinese iron ore mines suspend their production temporarily during the winter months. This spring, however, many will not even reopen. So far, however, the production cuts in China – the China Iron & Steel Association (CISA) estimates that production this year will decline by 70 million tons after quality adjustments – are not sufficient to absorb the additional supply from other countries. To put this in context, it is worth noting that China produced a good 1.3 billion tons of iron ore last year, according to data from the National Bureau of Statistics.
On the demand side, attention should be focused on the steel-producing countries which are the main consumers of iron ore – and on China in particular. According to figures from the World Steel Association, global steel production in 2014 grew by 1.2% year-on-year to 1.662 billion tons, China accounting for nearly half of this total. Nonetheless, increases in production have flattened noticeably, both on a global level and in China, though demand for iron ore has remained very robust of late. China had already imported a record 933 million tons of iron ore in 2014. CISA estimates that China will import 1 billion tons of iron ore this year for the first time, more than 80% of this expected to come from Australia and Brazil. According to data from Shanghai Steelhome Information Technology Co., iron ore stocks at Chinese ports had decreased to 97.6 million tons as per 6 February, putting them at their lowest level in twelve months. This likewise points to solid demand.
The seaborne iron ore market currently finds itself in a transitional phase in which supply significantly outstrips demand at present. It is likely to take some time for any sort of equilibrium to be restored on the market, so the iron ore price will probably not make any major upward surges. Rio Tinto believes that the transition will not happen smoothly, but will be accompanied by considerable volatility. In our opinion, the iron ore price will no doubt stabilize only when the production growth slows or production capacities are removed in grand style from the market. By year’s end we expect to see an iron ore price of $62 per ton.
The seaborne iron ore market is currently characterized by a massive oversupply. Production also keeps being further expanded despite the low prices, which will doubtless prevent prices from recovering for the time being. The iron ore price is only likely to stabilize if significant production capacities are shut down, Commerzbank said in a report.
