The price of spot iron ore has sunk to $75.50 per ton this week, its lowest level since 2009 and the scale of the price collapse has been breath-taking.
Iron ore has dropped by over 35 percent since the start of the year, a significantly worse performance than any other industrial metal. But what’s really shocking is that the price is now at a level that until recently was collectively deemed impossibly low, Reuters reported.
It was only in April that Jose Carlos Martins, executive officer of ferrous and strategy at Vale, the world’s largest producer of iron ore, told analysts that “one thing is for sure, the price will not go below $110 on a sustainable basis”.
Well, here the price trading was not just below $110 but a lot lower still. And sustainably so.
That tells you that something has gone very wrong with the iron ore narrative. This market is in a place it was not supposed to be.
And while big producers such as Vale, Rio Tinto and BHP Billiton are sticking to that narrative, they are now facing the unpredictable consequences of a pricing war they collectively started.
Nice Theory
The “big three”, which have some of the lowest-cost operations in the world, are bringing an unprecedented amount of new supply to the market.
Between them they lifted production by almost 12 percent over the first nine months of this year, and the ramp-ups and expansions are continuing.
They all knew that there would be an impact on price, but the theory, as expounded back in April by Vale, was that it would be limited.
After all, they could argue, the market for iron ore will still expand for many more years as the world’s biggest buyer, China, pumps out ever more steel to build infrastructure and new houses.
And lower-cost production from Brazil and Australia’s Pilbara will displace higher-cost production, not least in China itself.
Or as Sam Walsh, chief executive at Rio expressed it, “now is the time for others to really feel the consequences of the price against their operating costs and for them to make decisions”.
There’s plenty of anecdotal evidence that small higher-cost iron ore mines in China are indeed closing en masse, even if corroboration from its notoriously unreliable iron ore statistics is still sadly lacking.
As Australia’s share of China’s imports inexorably rises, it is clear that other marginal suppliers must be suffering too. But the price still shouldn’t be as low as it is.
The crashing iron ore price has wiped more than $10 billion of value off Australia’s four key pure-play iron ore miners so far this year, with Atlas Iron worst hit by the broad sell-off.
Together, Fortescue Metals Group, Mt Gibson Iron, Atlas Iron and BC Iron have suffered enormously from the near 45 percent fall in the iron ore price this year.
