A collapse of ore prices throws miners’ strategies into doubt and threatens an industry shakeout
Iron is one of the most abundant elements on earth but pulling it out of the ground efficiently can be a daunting undertaking. Snaking through the low, green hills of southern Brazil is a 530km pipeline, the decisive link in Anglo American’s $8.2bn Minas-Rio project to extract iron ore in the Brazilian interior and ship it from a new Atlantic port. Way over its original $3.6bn budget and two years late, Minas-Rio is finally close to the point of “first ore on ship”.
For years, huge mining projects such as these have formed the backbone of global economic expansion. The world’s most important commodity after crude oil, iron ore has been devoured by Chinese steel mills, emerging as the raw material for an infrastructure-led growth spurt.
But Minas-Rio is about to deliver its first ore into a much less welcoming world. The price of iron ore has plunged more than 40 per cent this year, the worst performance across metals and bulk commodities in 2014. From an average price of $135 per tonne last year, the benchmark iron ore contract sank last week to less than $80 for the first time since the global financial crisis.
“The iron ore market is in the midst of a transition without precedent in recent commodity history,” says Macquarie, the Australian bank.
Behind the change is a big increase in iron ore exports – and not just the 26.5m tonnes that Minas-Rio will bring to market when fully operational in 2016. Vale, Rio Tinto and BHP Billiton, the world’s dominant three producers, have collectively raised output from below 700m tonnes three years ago to well over 800m tonnes and have plans to push supply past 1bn tonnes within a few years. Fortescue, the number four producer, has gone from 41m to 124m tonnes in the same period and expects to pump out 155m tonnes this year. Hancock Prospecting expects its new 55m tonne per annum Roy Hill mine in Australia to start loading ore next year.
Mark Cutifani, chief executive of Anglo American, says miners have “overbaked the supply pie” in the commodities boom – and iron ore is the most telling example.
The supply tsunami is not the only factor weighing on prices. Concerns about a slowdown in demand from China, the world’s biggest steelmaker and consumer of seaborne iron ore, have also taken hold. “Given that two-thirds of traded iron ore ends up in China, Chinese demand for ore and Chinese domestic production are important determinants of the global price,” says CRU, a consultancy in London.
A slowdown in China’s residential property sector, where the construction boom has saddled many areas with oversupply and falling prices, has led to weakening steel demand. Unlike the big iron ore sell-off in 2012, when government stimulus helped prices rebound, Beijing is unlikely to alter its policy dramatically this time.
“If supply was the driver of iron ore weakness in the first half of the year, demand is now the problem,” says Colin Hamilton, head of commodities research at Macquarie.
A recent Goldman Sachs report warned of the potential for a long trend of declining prices. It said 2014 was “an inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean . . . the end of the Iron Age is here”.
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