Iron ore price falls to 5-year low, miners cut 140-mt new capacity

Iron ore producers have cancelled or suspended 22 mining projects since July as prices plunged to a five-year low, which will help to curb or even eliminate a supply surplus, according to Bloomberg Intelligence.

The cumulative cuts mean 140 million tonnes of extra capacity will not now hit the global market over the next few years, according to Kenneth Hoffman, an analyst at Bloomberg Intelligence in Skillman, New Jersey. Using an "aggressive" long-term assumption that demand for global shipments could grow five per cent a year, the global iron-ore market would be in deficit by 2018, Hoffman said on Tuesday in a report.

The price of the steelmaking ingredient delivered in Qingdao, China, fell 1.6 per cent to $66.84 a tonnes on Tuesday, according to Metal Bulletin data, the lowest since June 2, 2009. The price is down 50 per cent this year. About 100 million tonnes of new capacity has entered the market since July, and that has made the financing of new projects so challenging that even lower-cost mines are now being delayed or scrapped, Hoffman said.

Rio Tinto Group, the second-largest producer, said in November that it was deferring a final decision on its proposed Silvergrass mine in Australia. Also last month, Cliffs Natural Resources said it won't pursue an expansion of its Bloom Lake mine in Canada and may close the operation.

About 95 per cent of new supply over the next five years is slated to come from Brazil and Australia, where the infrastructure is already in place, production costs are low and the ore quality is among the best, Hoffman said.

Despite the bear market for the commodity, about 80 per cent of global output is still profitable, due in part to China easing taxes and tariffs on miners and energy prices falling, he said. Bloomberg Intelligence outlined a bearish base case in which demand contracts two per cent annually as China transitions from an economy driven by construction to one powered by services and manufacturing.

In that case, Chinese steel demand might have already peaked in 2013 and "the world would be awash in iron ore for the foreseeable future," Hoffman said.