Amid bearish environment, iron ore prices keep falling

So far this year, prices of benchmark ore (62 per cent iron content) have fallen 35 per cent to $75 a tonne, making the operation of a good number of mines across the world, including almost every unit in China, unviable. The principal steel-making ingredient, now at a five-year low, traded at $160 a tonne in February 2013. Many, including Western Australian premier Colin Barnett, suspect the three leading miners globally - Vale, Rio Tinto and BHP Billiton (which have a commanding share of the global iron ore market) - have united in pushing up supplies of their low cost mineral to edge out medium-to high-cost producers. In the first nine months of this year, when global steel production was up 2.1 per cent at 1.231 billion tonnes (bt), the trio had raised production 12 per cent.

Rio Tinto remains on course to raising ore production this year by nine per cent to 290 million tonnes (mt). This will, in time, be increased to 360 mt. Vale and BHP, too, are in major expansion mode.

What heightened the bearish sentiment was annual 0.1 per cent deceleration in global steel output in September at 134 mt. HSBC Holdings says this year, global iron ore output will be 100 mt more than demand, against 16 mt in 2013. However, what is sustaining huge investments in iron ore mines development, particularly in the Pilbara region of Western Australia and Brazil, is the unflagging faith of three dominant industry players that the market "won't remain oversupplied all the time and ore prices will rise again".

Price falls resulting from relentless mines expansion in the face of muted demand from China, which accounts for half the global steel production, are eating into royalties from mines. Barnett said owing to revenue losses, he did not rule out the possibility of enquiries by the World Trade Organization on whether the market remained increasingly oversupplied. Leading the industry's capacity expansion, Rio Tinto chief executive Sam Walsh dismisses insinuations the major producers are out to push down prices in concert to push other mining groups to the wall. What might stand in vindication of Walsh's assertion is most Rio expansion programmes were off the blocks "upwards of five years ago".

In his earlier ministerial capacity, Barnett had a hand in according sanctions to Rio projects in Pilbara.

As Rio Tinto is the world's lowest-cost ore producer, Walsh is prone to betraying bravado on occasions. Recently, he had said, "Between me and the current ore price, there are tier-II, III and IV producers. We have positioned our business to be the lowest-cost producer in the world. So, I don't think I'll be losing sleep about our ore business." In the context of the mineral's prices continuing to fall, he says now is the time for other miners to deliberate on the "consequences of prevailing price for their operating cost" and then make "decisions".

The big three might or might not be oversupplying the global market in concert. But the reality is at current levels, ore trading will force the closure of many mines in China and Africa. According to HSBC, the dispiriting outlook will ensure fall in Chinese production, for 62 per cent iron content, from 339 mt this year to 236 mt in 2015. Many experts believe this range of Chinese production collapse and the decommissioning of mines in other places might eventually create a floor of about $70 a tonne. But doubts arise about that level when one considers the Citigroup forecast of the mineral sinking below $60 a tonne. ANZ scaling down its price forecast for 2015 from $101 a tonne to $78 and for 2016 from $95 to $89 is leaving most sector constituents distraught.

All price forecasts, however, need to be taken with a pinch of salt. Not very long ago, a Vale executive had said, "One thing is for sure: Iron ore prices will not go below $110 on a sustainable basis...Many times, we have seen the price going below this level, but bouncing back quite fast."

China has, for long, made "opportunistic" purchases of all kinds of minerals and metals when prices are low to build strategic inventories; now, it is making routine purchases of iron ore. The fate of the iron-containing mineral depends much on China, which accounts for 67 per cent of seaborne trade.

GRIM OUTLOOK

• So far this year, prices of benchmark ore have fallen 35 per cent to $75 a tonne
   
• Vale, Rio Tinto and BHP Billiton have raised output 12% in the first 9 months of this year
   
• Rio Tinto remains on course to raising ore production this year nine per cent to 290 mt
   
• What heightened the bearish sentiment was an annual 0.1% deceleration in global steel output in September at 134 mt
   
• HSBC says the dispiriting outlook will ensure fall in Chinese production of benchmark ore from 339 mt this year to 236 mt in 2015
  

 

ANZ has scaled down its price forecast for 2015 from $101 a tonne to $78 and for 2016 from $95 to $89