Iron Ore Prices

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Iron ore price sinks to $US70
DANIEL PALMER BUSINESS SPECTATOR NOVEMBER 20, 2014 10:40AM

Iron ore in the pits
INVESTORS remain unsure as to when it will be safe to catch the falling knife that is iron ore prices, with the commodity again sinking to a new five-year low overnight.

At the end of the offshore session on Wednesday, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US70 a tonne, down 2.9 per cent from its previous close of $US72.10 and off over 7 per cent across the past two trading days.

This week’s sharp falls have stirred a heavy sell-off in the stock of iron ore miners, with Fortescue Metals Group, BC Iron and Mt Gibson among the hardest hit, with double-digit percentage declines. All three are now trading at 52-week lows and have lost more than 50 per cent of their value since the start of the year.

IRON ORE: Unprofitable miners hammered

Diversified giants BHP Billiton and Rio Tinto have held up comparatively well, but are still losing ground in otherwise flat markets. Both firms saw their UK-listed stock give up 2 per cent in overnight trade, representing their worst offshore session for the week and pointing to another day of red numbers on the ASX.

The commodity has now lost close to 50 per cent of its value this year as investors head for the exits during a period of rapid supply increase from mining heavyweights and demand weakness from key consumer China.

After a strong October, the commodity is now on track to record its fourth straight double-digit quarterly percentage decline.

The latest moves come after BC Iron yesterday hinted at confidence in a near-term recovery as the firm sees the price of the commodity fall below its rumoured break-even level.

“We believe the iron ore price will improve as China and other customers in different markets continue with infrastructure development and general economic growth,” BC Iron chairman Anthony Kiernan said.

Such confidence has not been shared by analysts of late, with banks continuing to revise their forecasts lower.

Last week, both ANZ and Citi analysts slashed their forecasts for iron ore in the coming years, with ANZ confident that the $US100 a tonne mark will not be seen in the medium-term.

ANZ tipped a floor at around the $US70 a tonne level, but based on last night’s moves, Citi’s prediction of the commodity sinking below $US60 a tonne at some stage in the next 12 months appears well within reach.

Commonwealth Bank’s commodity desk is also rewriting its expectations, warning that predictions for a restocking in China to round out the year may come to naught, placing further pressure on prices.

“We no longer expect a meaningful iron ore restock later in the year as steel mills in China are content to purchase iron ore at their convenience,” the bank said.

“The fall in prices is consistent with expectations amongst Chinese steel mills who are anticipating iron ore to fall under $US70 a tonne in the 2015 first half.”

BHP today holds its annual general meeting in Adelaide, with plenty of questions tipped to fly about its strategy to raise supply during a period of plummeting prices.

Business Spectator

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Iron ore success of Rio and BHP is worth celebrating
THE AUSTRALIAN NOVEMBER 21, 2014 12:00AM

Barry FitzGerald

Resources Editor
Melbourne
IT is a cause for national celebration when Australia smashes the competition on the international sporting stage. But according to West Australian Premier Colin Barnett and some others, it might not be such a good idea when we smash the international competition in iron ore.

The argument goes that the hand-over-fist growth in production in the Pilbara by Rio Tinto and BHP Billiton is a major factor in the seaborne trade in iron ore moving into oversupply for the first time in more than a decade, dragging down prices in the process, which is all very true.

It is also very true of Andrew Forrest’s Fortescue, the third-­biggest Pilbara producer. It had trebled exports in the past four years, and recently told analysts of a new push from 155 million ­tonnes annually to 180 million tonnes.

But in true underdog style, that has not stopped Fortescue chief executive Nev Power from also criticising Rio and BHP for trashing the market, even though by the same logic, so is Fortescue.

Fortescue can be forgiven for being sensitive on the subject because it is more exposed to the crash in prices to $US70 a tonne than either Rio or BHP because of its lower grade material and higher costs of production. Barnett, an economist, should know better, but can also be forgiven because of the importance of iron ore royalties to the WA economy.

Forgiven perhaps, but there is no getting away from the fact that commentaries on the evils of increasing supply in an over­supplied market are naive in the extreme.

The commentaries suggest it would be best for Rio and BHP — Fortescue has to be included — to halt their ongoing expansions as a prop to prices.

The suggestion seems to be that such action would save Australia’s higher-cost producers, all of which are now losing money — or are about to, should prices continue to weaken.

But there should be no surprise that neither Rio or BHP are having any of that. They are the ­lowest-cost producers in the world, and enjoy a freight advantage over the main overseas competitor Brazil in the key China market.

The companies, and to a lesser extent Fortescue, remain highly profitable in iron ore at the current beaten-up price level.

Fortescue is starting to sweat at $US70 a tonne, but with break-even costs well below $US50 a tonne, Rio and BHP still enjoy fat 30 per cent margins.

And that is why they are chasing the additional production, most of which is coming from what BHP calls “sweating’’ the assets in place rather than new projects. As BHP chief executive Andrew Mackenzie noted at yesterday’s annual meeting in Adelaide, the last major iron ore project approved by the company was in March 2011.

The alternative to sweating the assets would be to try to push prices higher with production cuts and stalled expansions.

But all that would do is allow high-cost production to continue. It is also premised on the assumption that there will in fact be a period of higher prices in the future, something which China’s slowing economy, and its developing scrap capabilities, suggest might just not eventuate.

As it is, it has been estimated that close to 200 million tonnes of high-cost annual production have already fallen over in response to iron ore’s dramatic price fall.

That is equivalent to 30 per cent of Australia’s production. But here’s the good thing from Australia’s perspective — the cuts have been made at ­privately-owned operations in China, and in non-traditional supply nations, which only got into the business because of the previously elevated prices.

So Australia has been smashing the international competition.

Yep, there have been, and there will be, more casualties among local higher-cost producers. But the net gain to Australia of knocking out overseas competition — and limiting the supply response of the next best in the industry, the Brazilians — will be worth the isolated pain, remembering that Rio and BHP’s low-cost base, spread over more tonnes, means little damage to their iron ore earnings in the lower price environment.

The final thoughts on all this go to Rio chief executive Sam Walsh. In an interview last month, Walsh demolished the critics.

“People know that the business is cyclical. It always has been, it always will be. And those who are high-cost will then make a lot of money when prices are high. And, guess what?

“They’ll have to close when prices are low. But that’s the decision they’ve made; that’s not our decision. It’s the true effect of supply and demand. And it happens outside of the mining industry. It happens in manufacturing, it happens in agriculture, it happens with energy, oil and gas ... It happens across the board. So it’s nothing new to the world.’’

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Iron ore struggles as glory days end

Lisa Murray and Lucy Gao
1088 words
22 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

China Dropping iron ore prices will mean a dramatic readjustment for the steel industry.

At Taicang Port on the edge of Shanghai, a young construction worker is kicking back in his bulldozer, feet on the dashboard.

Behind him rise piles of dusty, rust-coloured iron ore, waiting to be picked up and transported down the Yangtze River to the bustling industrial city of Wuhan in central China.

There is one pile that looks a bit different. While the others are smooth mounds of iron ore, this one has lost its shape and is lined with ridges.

Mr Sun, who has been working at the port for the past seven years and offers only his last name, explains it has been sitting there for more than five months.

"It's very unusual for a pile to sit there so long," he says.

Taicang Port is running out of space. It is currently undergoing an expansion to boost its storage capacity by more than a third and make room for the increasing number of loads heading its way from Australia and Brazil.

"Last year, the port was only 50 to 60 per cent full but for the first eight months of this year, it was more than 80 per cent full," says Zhang Zhipeng, a director of Taicang Wugang Terminal Company, who manages logistics for his trader clients.Global giants have ramped up production

Across China's ports, iron ore stockpiles have stayed above 100 million tonnes for the past nine months as real estate investment slowed sharply hitting indebted steel mills that were already struggling to source finance. Global giants have ramped

At the same time, and perhaps more importantly, the world's big producers Rio Tinto, BHP Billiton and Vale ramped up production.

The latest figures suggest stockpiles at ports are at 108.8 million tonnes, on top of the roughly 30 million tonnes ­sitting at domestic iron ore mines.

It's not as high as the middle of the year when stockpiles at ports were up above 115 million tonnes but it's enough to help push the price this week to a fresh five-year low of $US70.20 a tonne, down from $US130 a tonne at the start of the year.

Traders and analysts in China believe the halcyon days for iron ore are over.

"The price can never go back to $100," says Du Yanan, an analyst at CU Steel, who speaks daily with steel mills, traders and port managers.

"It will be between $60 and $80 for a long time." While the price has come down, Australian producers have managed to pick up market share.

For the first three quarters of this year, they accounted for 58 per cent of the more than 690 million tonnes of the steel making commodity imported into China. That was up from 51 per cent last year and was mainly to the detriment of smaller players like South Africa and Iran.

At Taicang Port, Mr Sun, says there is mainly Australian iron ore. The port is looking to take advantage of its position at the mouth of the Yangtze River as a key hub for iron ore headed to steel mills in China's fast-growing western regions. However, depressed prices are clouding the outlook. Chinese miners are hoarding their own stocks hoping for better prices and steel mills are delaying purchases waiting for prices to fall further.

Traders, who are starting to share the same view as the mills, are now trying to offload their iron ore as fast as possible to avoid the risk of holding on too long. Meanwhile, the government crackdown on the use of iron ore and other metals to back questionable financing deals has taken a whole ­segment of buyers out of the market.

"Demand for iron ore right now is not very strong because the steel mills are struggling to get credit," says Ms Bian, a trader from Wangbao Trading, one of the largest players in Shandong province.

In a sign of the times, Wangbao, which turns over 30 billion yuan ($5.7 billion ) a year, is now looking to reduce its iron ore business and focus more on trading agricultural commodities.

However, while the iron ore price may not be headed back up above $100, Ms Bian doesn't think it will collapse.

"China still needs to build infrastructure and it is still developing the country's west," she says.

This is a view shared by Curtis Zhu, senior analyst for steel and iron ore markets at Wood Mackenzie. He says that over the next five years, growth in China's steel production will slow to an annual rate of around 2 per cent because of the weak housing market and a drop in exports. But that doesn't mean it will peak.

"Although Chinese steel production is moving into a low-growth period, we don't think steel production will actually peak within five years," he says.

"The investment into infrastructure development will remain relatively strong as it is physically needed and it is needed to somehow maintain a reasonable [gross domestic product] growth. This will underpin domestic steel demand."

Even so, Mr Zhu says there is still a chance that some steel companies will collapse in the short-term. This week, one of China's largest privately-owned mills, Haixin Steel, started bankruptcy proceedings, having halted production in March.

The company was unable to manage its 10.5 billion yuan debt load as a ­general credit tightening across the banking system made it difficult to refinance.

Haixin's woes have triggered concern about whether China's steel sector is on the brink of a dramatic readjustment that could further dent the iron ore price.

"The reality is that whether a steel plant is bankrupt or not is up to financial support from the local government where a steel plant is located," says Mr Zhu. "Given that steel demand will slow down and finance for steel industry is tough, we expect that some struggling steel plants will end up [in] liquidation."

The optimists believe the recent weakness in the iron ore price will lead to more stability by clearing out the industry of questionable traders, inefficient Chinese miners and bankrupt steel mills. At Taicang Port, Mr Jiang says iron ore imports will continue to rise next year. "Iron ore is so cheap now, there are incentives for the steel mills to keep going."


Fairfax Media Management Pty Limited

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Why iron ore miners are expanding

Amanda Saunders
692 words
20 Nov 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Australia's major iron ore producers are caught in a "prisoners' dilemma" that has left them with no choice but to expand and flood a depressed market with more tonnes, says top local fund Auscap Asset Management.

Iron ore out of the port of Qingdao in China slumped 4.4 per cent to $US71.80 a tonne on Wednesday, taking its total decline for the year to more than 46 per cent.

While growing concerns about China's economy, and particularly the housing market, are weighing on iron ore prices, there is also the fact the four main forces in iron ore – Rio Tinto, BHP Billiton, Fortescue Metals Group, and Brazil's Vale – are continuing to increase production, with plans to inject tens of millions more tonnes into the market in the coming year.

Auscap looks to game theory to assess why the large iron ore producers are continuing to increase production, even though it could well lead to a worse result for all.

Given how high iron ore prices have been compared to the cost of production for the major producers, it would be in their collective interest to limit production and maximise profits.

But because neither player knows how the other will act, they have to ­consider the opportunity set from only their own perspective.

The prisoners' dilemma is an economic game theory that analyses why, in the absence of collusion, two parties might make decisions that ultimately leave them both worse off than if they had colluded.

Under this model, two people have been caught by authorities and are suspected of committing crimes but there is not enough evidence to convict them.

So the prisoners are separated (prevented from colluding) and given the following options: if neither confess they will each receive one year in prison: if one of them confesses they will receive a pardon, while the other will receive 20 years in prison and if they both confess they will each receive five years in prison.

Both confess.

Applying this to the iron ore market, the four biggest players are acting exactly as expected, Sydney-based ­Auscap says. "Unable to collude, the major iron ore producers are faced with the ­ultimate prisoners' dilemma," ­Auscap says.

If each were to refuse to increase supply, prices would stay high and each company would maximise their ­profitability. But the companies cannot risk holding back on increasing supply in case their competitors decide to.

"They must maximise production because they do not, by themselves, control price," Auscap notes.

Last month, Western Australian Premier Colin Barnett accused BHP and Rio of collusion, saying they were "seemingly acting in concert" by flooding a weak iron ore market.

Six months earlier the Premier had praised Rio for creating jobs through their iron ore expansion in Western Australia.

But the Premier's main grievance appeared to be the hit to his royalties chest. "The question the government might ask is whether this outcome was avoidable?" Auscap said.

"To some extent it is ironic that there are suggestions of collusion between Rio and BHP, because it implies that collusion would necessarily have led to the same significantly increased ­volumes of production, which might not have been the case."

So despite the likelihood of ­materially lower iron-ore prices, and the potential for lower profits, the big producers will almost inevitably ­continue to increase production.

"Realistically the only party that potentially has the power and ­inclination to prevent the less desirable outcome, the prisoners' dilemma ­outcome, from occurring in the iron ore sector is in fact the Western Australian government."

But Auscap expects the production increases will continue.

"Given the fiduciary duties of ­directors to maximise shareholder value through rational decision-making, and the obligation on the major iron ore producers not ­to collude on supply or pricing, it seems very unlikely that the boards of BHP, Rio and FMG could ever have come to a different ­conclusion," Auscap says.

Key points Growing concerns about China's economy are weighing on iron ore prices. But Rio Tinto, BHP and other big players continue to increase production.


Fairfax Media Management Pty Limited

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Iron ore slide below $US70 a tonne threatens profits
THE AUSTRALIAN NOVEMBER 24, 2014 12:00AM

Sarah-Jane Tasker

Reporter
Sydney
Mining indicatorsMining indicators Source: TheAustralian < PrevNext >
••
THE price of Australia’s top export commodity, iron ore, has continued its slide and dipped below $US70 a tonne, adding a new blow to domestic producers, as industry leaders warn that wider market conditions are the worst they have seen in 25 years.

The price of the steelmaking ingredient hit $US69.80 on Friday evening, according to The Steel Index, signalling a 12.5 per cent price drop in the past month.

A list of Australian producers’ break-even costs on the production of iron ore shows many are above $US70 a tonne, including Mount Gibson Iron and Atlas Iron and some analysts have Fortescue Metals Group’s costs above that level as well.

Pilbara giants Rio Tinto and BHP Billiton are the lowest-cost producers at about $US45-$US50 a tonne and BHP boss Andrew Mackenzie said last week the miner had expected the low price environment and was ready for it. He also defended the miner’s strategy of increasing production in an oversupplied, low-price environment.

Commodity prices across the board have been suffering in a low-price environment and the heads of US giant Peabody Energy, Centennial Coal and Northparkes Mines have all warned that market conditions are the worst they have seen in 25 years.

David Moult, chief executive of Centennial Coal, said that when he arrived in Australia from Britain in the mid-1990s, conditions were poor but nowhere near what the industry was witnessing today.

Northparkes managing director Stefanie Loader echoed those sentiments during the NSW Minerals Council’s conference, adding that she had not seen exploration levels this low for 20 years.

“There are some brave companies but there isn’t a lot of new greenfields exploration opening up new areas,” she said.

The industry heads, including Peabody’s Australian president Charles Meintjes, said companies were aggressively focused on bringing down costs and increasing productivity to protect margins in a historically low-price environment.

“You have seen a different dynamic where the capital cost to ­develop a new project rose dramatically in the boom and we are now seeing a shift where people would rather extend the life of the existing deposit than go into new operations,” Mr Meintjes said.

Mr Moult added that the market was “totally” out of balance. He said that in normal circumstances the market would balance itself and producers would pull supply out of the system to drive up ­prices.

“If we don’t make difficult decisions, we won’t get the balance back and if we don’t get the balance back then all I can see is we will keep bobbing along at the bottom of this market and the industry’s returns will be such that it won’t be able to reinvest and grow and look to a strong future,” he warned.

ANZ Bank’s chairman for NSW and ACT, Warwick Smith, said it was clear the sector was going through a tough time and it was expected to get tougher.

“We have seen the term care and maintenance coming to the fore. These are issues that we do understand and we apply as many different strategies as we can to be supportive of our clients because we take a long-term view,” he said. “Most people would agree that we have had stellar pricing from extractive resources in this country for some time. While there continues to be a demand level there, it is going to be at a lower pricing.”

The former Liberal MP, who served under John Howard, said with the focus now on productivity, industrial relations had to be examined, He added that employers needed to be able to be flexible in wages and conditions.

“That structure needs to reflect the reality of the marketplace,” Mr Smith said.

Economic forecaster and industry analyst BIS Shrapnel has outlined in a report, to be released today, that miners should expect less than ideal conditions to continue over the next few years.

Adrian Hart, senior manager of BIS Shrapnel’s infrastructure and mining unit, said the much-publicised losses in employment and the closure of mining operations were the consequences of a market reeling from lower prices, a stubbornly strong Australian dollar and weaker growth in export demand.

“The price of coal and iron ore — the two flagship bulk commodities which had held Australia’s exports high over the last few years — has suffered significantly over the past years, recording multi-year lows,” Mr Hart said.

The report highlighted that the mining investment boom peaked in 2013-14 at $93.1 billion and was expected to decline by 40 per cent over the next four years.

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Iron ore rout extends below $US70
DANIEL PALMER BUSINESS SPECTATOR NOVEMBER 26, 2014 7:06AM

HOPES a floor in the iron ore price had been reached earlier this week were dashed overnight as the commodity sunk to a new five-year low.

At the end of the offshore session overnight (AEDT), benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US68.60 a tonne, down 2 per cent from its previous close of $US70 a tonne. It also left the commodity at its lowest level since the middle of 2009, eclipsing the previous 2014 low of $US69.80 reached on Friday.

Iron ore prices are now 50 per cent off the levels seen at the start of the year, leaving almost the entire Australian sector outside BHP Billiton, Rio Tinto and, perhaps, Fortescue Metals Group under water. All three heavyweights are seeing profits erode, with Fortescue’s margins, in particular, in grave danger.

Despite the fresh falls, Rio’s UK-listed stock managed to eke out a slim 0.2 per cent gain overnight, but this likely owed more to the prospect of fresh M & A activity from suitor Glencore next year rather than investor indifference to the iron ore price falls.

Rival BHP didn’t fare so well, losing 1.7 per cent in London trade.

The moves come ahead of a likely revision in the pricing expectations of the Bureau of Resources and Energy Economics (BREE) next month, with the official government forecaster tipped to slash its forward projections.

Its most recent forecast called for a pricing range of $US90-$US105 a tonne over the next five years.

Business Spectator

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Iron ore prices could stay depressed for 10 years
THE AUSTRALIAN DECEMBER 01, 2014 12:00AM

Scott Murdoch

China Correspondent
Beijing
Iron ore prices may stay depressed
China has ordered its steelmakers to cut production by 30 million tonnes. Source: AFP

A PROMINENT Chinese fund manager has grimly forecast that the global iron ore price could remain under pressure for 10 years as oversupply continues to hit the market and the Chinese residential property market slumps.

Shanghai Jianfeng vice-president Liang Ruian believes prices could slide below $US60 a tonne within the next year and could even fall to as low as $US50 a tonne, with major consequences for miners around the world.

The iron price on the weekend was $US71.32 a tonne, up $US1.34, but the commodity is down more than 50 per cent this year.

The price slide has prompted miners to rethink capital expenditure plans and intensifies pressure on companies struggling to bring projects to the production stage.

Mr Liang, a well known fund manager in Shanghai, said the price of iron ore would be heavily affected by the performance of the domestic Chinese real estate ­market.

About 30 per cent of China’s steel output is used in residential development, which is forecast to remain flat in the next few years after a surge following the global financial crisis.

It is estimated China now has a nationwide inventory of housing to last up to three years.

“I am pessimistic about the iron ore price because I see the stagnant prospects of the Chinese real estate market which is going to have devastating effects for the steel industry,” Mr Liang told The Australian.

“The inventory of housing is up to a couple of years, while in China the rapid development of the e-commerce market is having a big impact on the sales and rents for the commercial real estate market. I think the golden ten years that we have had in the real estate market in China is over.

“The crash of the real estate market means the crash of the steel market.”

Nationwide, Chinese house prices fell by 2.3 per cent during October compared with the same month last year, the largest decline in nearly three years.

Prices in Beijing dropped by 1.3 per cent, the first slip since ­October 2012, and new home ­prices were down in 69 of 70 major cities measured by the National Bureau of Statistics.

China revealed last week there was 108.4 million tonnes of iron ore, mostly from Australia, on hand at its ports, nearly 30 per cent more than last year.

The nation’s steel mills have been gradually building up inventories over the past few months to take advantage of weaker iron ore prices, event though the industry is under major pressure.

The Chinese government has ordered 30 million tonnes of production to be cut this year, on top of 10 million tonnes in 2013.

In October, China produced 67.5 million tonnes of crude steel, down 0.3 per cent year on year, but analysts expect the government will order production to slow further in order to meet its 2030 carbon emissions cap.

“Given the situation we are facing with real estate in China plus the oversupply caused by foreign producers’ expansion of production, I can say in 2015 the iron ore price will hardly be above $US60 a tonne,” Mr Liang said. “I’m worried that it could be even closer to $US50 a tonne.

“I don’t think we will see a bull market for iron ore in the next 10 years. There might be some bounces in the price but I think they will only be small.”

China Metallurgical Industry Association president Li Xingchuang last week said he expected that Chinese steel consumption would peak at 740 million tonnes a year in 2017, more than a decade earlier than most iron ore producers expected.

[BlueKelah]

Either he is calling it like he sees it or his fund is heavily shorting Iron miners and steel companies.

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China’s slowdown hits price of iron ore
DOW JONES DECEMBER 01, 2014 12:00PM

China’s hunger for minerals to build skyscrapers, cars and bridges produced a decade long surge in the price and production of key commodities.

Now, exporting nations are feeling the hit as the China-fueled boom slows.

Topping the list are big commodity players Australia and Brazil, but also resource-rich countries, such as Guinea, Indonesia and Mongolia, where minerals make up a disproportionate share of the economy and employment.

In countries specializing in crucial commodities, such as iron ore and coal, sluggish demand and falling commodity prices are reducing government tax revenue, increasing trade deficits and affecting currency values.

The Australian dollar reached a four-year low in November against the U.S. dollar due in part to sliding raw-material prices and slowing Chinese demand growth for those commodities.

J.P. Morgan recently cut its forecast for 2015 Australian economic growth to 2.8 per cent from 3.3 per cent, while Brazil halved its own growth forecast for 2014 to 0.9 per cent from 1.8 per cent. Mining profits as a share of the economy in both countries more than doubled during the past 15 years, according to the World Bank.

The longer-term impact of a collapse in commodity prices could be even more profound, hurting the economies of producing countries and boosting buying power in Western consumer economies.

“The impact of oversupply could be a mess,” says Lourenco Goncalves, CEO of Cliffs Natural Resources Inc., a midsize miner that laid off workers in Australia.

Meanwhile, the biggest mining companies say they are still committed to plans to keep topping production records. Rio Tinto PLC and BHP Billiton Ltd. have been shipping cargoes from Australia’s remote northwest at record rates.

For smaller countries, the growing dependence on mining is even more apparent. In Guinea, the share of mining profits as a percentage of GDP more than tripled to 18.3 per cent from 2000 to 2012, the latest data available, according to the World Bank. In Mongolia, it nearly doubled to 11.9 per cent.

At this point, no country can absorb China’s slack, although executives at mining companies, such as BHP Billiton, hope India may help absorb new production. Still, China is expected to set the tone for the next decade.

No commodity has been as China-dependent as iron ore, and for good reason: China makes half of the world’s steel, and 98 per cent of iron ore goes into steel production. China imports two-thirds of the 1.2 billion tons of iron ore traded annually on seaborne markets.

Far more countries have come to feed at the China trough: In 2003, eight nations exported more than 10 million tons of iron ore. Last year, nearly twice as many-15 countries-did so.

Australia, the world’s top iron-ore exporter, sends 80 per cent of its iron ore-worth US$67 billion last year-to China, and Brazil sends half its production of the mineral there.

In recent years, mining companies in those countries have ramped up production, employment and investment in railroads and ports anticipating that China’s steel industry would increase production and need more iron ore.

Instead, during the first eight months of the year, Chinese steel consumption fell 0.3 per cent to 500 million tons-the first such decline in 14 years.

“The country is settling into a slower steel consumption pattern, more typical of modern, developed Western economies,” says Daniel Rohr, an analyst at Morningstar Inc.

The upshot: a growing glut of iron ore. By 2018, the estimated iron-ore surplus will exceed 300 million tons, which could send prices next year into the US$50-a-ton range, according to Citigroup , after starting the year at US$135 a ton and slipping to US$69.80 on Friday.

The obvious response would be for the iron-ore industry to significantly scale back or eliminate output. But no one is budging.

Australia and Brazil are expected to squeeze out other players. Australia now accounts for about half of all iron ore traded by sea.

After investing billions to build railroads and ports, BHP and Rio say they will continue producing and squeeze costs out of production to make up for lower prices. That could mean renegotiated deals with suppliers of contract labourers, catering services and machines, and thousands of layoffs.

“Generally, when you have installed capacity, if you stop producing it, you end up with higher costs on a unit basis,” BHP CEO Andrew Mackenzie told reporters recently. “Our intention is always to maximize the production from existing capacity.”

Finally, another threat to iron ore awaits: scrap.

In a few years-a generation after it began mass-producing steel-China will start harvesting massive amounts of scrap steel from its first generation of mass-produced cars and washing machines. In large enough quantities, scrap steel can serve as an acceptable substitute for iron ore.

“The amount of recycling of material is going to increase, and that means you’ll make more and more steel from scrap, and not iron-ore and metallurgical coal,” Mr. Mackenzie said.

Adding scrap to the mix will worsen commodity oversupply-and the impact of lower prices on the global economy.

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Iron ore price firms to regain $US70 mark
DANIEL PALMER BUSINESS SPECTATOR DECEMBER 02, 2014 7:54AM

THE price of iron ore has returned to levels above $US70 a tonne after a weak November trading period forced the commodity down to as low as $US68 a tonne.

At the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US70.60 a tonne, up 1.1 per cent from its previous close of $US69.80 a tonne and almost 4 per cent above the five-year low of $US68 reached last week.

The gains came despite renewed concerns about the Chinese economy after the HSBC purchasing managers’ index (PMI) came in at 50.3, below expectations of a 50.6 reading.

The data was the latest sign of cooling manufacturing growth in China and helped drive commodity price weakness during Asian trade.

However, bargain-hunters stepped in overnight to bid up commodities, with gold, oil and iron ore all rallying at least one per cent.

Iron ore has now seen three straight positive trading days since hitting its five-year trough on Wednesday last week, with the recovery following a more positive outlook from iron ore heavyweight Vale.

“There was a lot of volatility in prices this year and the market is undershooting at the moment and this will bring about a correction,” Vale boss Murilo Ferreira said last week.

“This correction will come through the closure of many inefficient miners of high cost and poor quality iron ore.”

The commodity’s weak 2014, during which it has lost over 45 per cent of its value, has been predicated on rising supply as Vale, BHP Billiton and Rio Tinto all sharply increase production.

The moves have been criticised by many analysts but the miners have remained steadfast in their plan to raise supply.

“Even the iron ore price where it is today can induce more volume,” BHP’s president of iron ore, Jimmy Wilson, said over the weekend. “If that volume doesn’t come from our business, it’s going to come from others around the world.”

The UK-listed stock of Rio and BHP still lost ground in London trade despite the iron ore price recovery, with Rio giving up 1.2 per cent and BHP slumping 2.2 per cent.

In local trade yesterday BHP stock lost over 5 per cent in sinking to a five-year low.