Iron ore with 62 percent content at the Chinese port of Qingdao dropped 0.7 percent to $87.70 a dry ton today, the lowest since October 2009, according to data compiled by Metal Bulletin Ltd. The raw material fell for a ninth day in the worst run since September 2013.
Spot iron ore prices have fallen more than 34 percent this year. The rout, fuelled by excess supplies, has forced Chinese steel mills to resell some cargoes back to the market as global miners kept on ramping up output.
Iron ore prices will fall further because there’s too much supply of the main ingredient for steel, the head of Austria’s largest steelmaker said, deepening a slump that’s curbed profits at the world’s biggest miners. “We still have enormous overcapacity in iron ore,” Wolfgang Eder, CEO of Voestalpine AG, said in an interview. “This will put additional pressure on the price.”
BHP, Rio and Fortescue have been ramping up production at their Pilbara region mines in Western Australia. BHP and Rio, which are by far the lowest-cost operators and will easily weather lower prices, have flagged that they will approve more low-cost expansions to bring more than 100 million tonnes of annual capacity beyond their current board-sanctioned plans, while Gina Rinehart’s Hancock Prospecting is planning another 55 million tonnes of capacity.
Speaking to analysts after the announcement of second-quarter results, Rio Tinto chief executive Sam Walsh dismissed any suggestion that the company should hold back from increasing production at a time when demand from China was cooling. “Now is not a time for the best iron ore producer in the world to take a step back,” he said. “Now is the time for others to really feel the consequences of the price against their operating costs and for them to make decisions.”
The extent of the recent falls is now starting to have a serious impact on the share prices of the sector heavyweights, with Rio Tinto’s UK-listed stock sinking 4% overnight and BHP’s UK-listed shares yielding almost 3%.
The producers “are trying to out-compete Chinese domestic producers and steal market share from the incumbent suppliers,” Paul Gait, an analyst at Sanford C. Bernstein Ltd. in London, said. “They’re using price mechanism by which they hope to achieve that.”
The slump in the iron ore price is a response to the slowing growth in China and record production from miners. China contributes more than a quarter of world economic growth and buys around two-thirds of all the iron ore sold globally.
The cracks in the Chinese economy are growing wider as its property market falls. In July Chinese home prices fell in almost every city surveyed by the National Bureau of statistics, the biggest monthly decline since records began. Property construction is responsible for a third of all iron ore consumption in China.
Iron-ore supply on the seaborne market may increase by 45 percent to 1.65 billion tons by 2018, according to Bloomberg Intelligence analysts Christopher Krug and Kenneth Hoffman.
Wolfgang Eder sees prices at $90 to $100 a ton for the rest of 2014 before settling at $80 to $90 in the medium term. “In the long run a fair price will be between $80 and $90 a ton,” he said.
Morgan Stanley analyst Joel Crane believes Iron Ore index is headed for a sustained collapse before rebounding. He cites the recent downward pressure on steel billet and rebar prices in China thanks to elevated steel construction and a seasonally slower consumer period. Adding to these pressure is the tendency of steel makers to “adopt a ‘wait and see’ approach during bouts of price weakness to see how low it can go“.