Iron ore price meltdown

Australia , China , Commodities , Iron ore , Metals , Steel Jan 30, 2015 No Comments

Iron ore price meltdownAt the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $62.80 a tonne, down 0.8 per cent from its previous close of $63.30 a tonne. The price is now at its weakest point since the middle of 2009. It has now lost 11 per cent of its value since January 1 after suffering a 47 per cent decline in 2014.

The raw material has been in a bear market since March after Rio Tinto Group, BHP Billiton Ltd. and Vale SA spent billions of dollars to boost low-cost output even as China slowed. Goldman Sachs Group Inc. joined global banks on Friday in cutting price forecasts for 2015, predicting a return to a bull market is probably more than a decade away. The love affair between China and iron ore is cooling, the bank said.

After falling more than 40 per cent in 2014, iron ore prices have now fallen a further 11 per cent over the past three weeks, and the continuing slide prompted more selling of shares in Fortescue Metals Group, BHP Billiton, Rio Tinto and BC Iron on Tuesday. More iron ore mines will shut before the end of 2015, according to the analysts at Citi, who believe the closures announced by Arrium Limited, who decided to mothball about 40 per cent of its iron ore production in South Australia last week, are just the beginning.

Eight months after the price dipped to less than $US100 a tonne, Australian miners are giving up hope of a significant price recovery, and are instead cutting their businesses down to size. Arrium, Australia’s fourth-biggest iron ore exporter, became the first Australian producer to shut down a decent-sized iron ore operation, closing its Peculiar Knob mine, cutting 580 jobs and flagging $1.17bn of iron ore-related writedowns in its first-half profit. Australia’s Bureau of Resources and Energy Economics (BREE) says that while Australia will export a record 747 million tonnes of iron ore in 2014-15, its export value will decrease 24 per cent to $57 billion.

Over the last four or five years we’ve seen the iron ore market expanding by about 40 to 45 million tonnes per annum, and that’s led to this hand-over-fist bit of an unruly expansion in iron ore mines, in Western Australia, West Africa and Brazil, to meet that growing demand out of China. What we’ve seen is that the market is now fully supplied. What we’re seeing is just a big wave, a tsunami of iron ore, coming out of the Pilbara and elsewhere”, said independent analyst Peter Strachan.

In China, which consumers more than 70% of world seaborne trade, steel mills are cutting back on production as property and infrastructure investment in the country slow markedly after decades of breakneck growth. China eliminated 31.1 million tonnes of steel production capacity last year, higher than expected, a senior official of the industrial ministry said, as Beijing seeks to ease overcapacity and improve air quality. Beijing has also set a target of eliminating 27 million tonnes of steel output this year. Steel demand in the world’s biggest producer of the alloy has slowed as construction activities have been hampered by cold weather, further dampening prices.

With the recent collapse in steel prices, many Chinese steel mills are now not profiting from producing steel—they were in 2014,” said Jeffrey Landsberg, managing director of U.S.-based Commodore Research & Consultancy. “Many people don’t realize that Chinese steel prices were rather resilient last year, but that prices are now collapsing.”

One problem for Chinese steelmakers is that they can’t easily export their excess supply. Last year, China gradually stepped up its steel exports as domestic demand dropped. It sold mainly to countries across Asia such as South Korea, Vietnam and the Philippines. China exported a record 10.2 million tons in December, but demand for its steel appears to be waning, analysts say, with demand from Asian countries unable to keep pace with China’s rising supplies at a time when many are facing moderating growth.

Iron ore has risen just once in the past 14 trading days as investors eye softer demand from China ahead of the Lunar New Year in February. In previous years, the commodity has risen in the last quarter of the year as Chinese steel mills stocked up ahead of Chinese New Year, but that did not happen in 2014, creating a risk of further weakness in coming weeks. Adding to the downbeat outlook is consistent downward revisions to price forecasts from leading investment banks, with Goldman Sachs following Citi, Macquarie and UBS in slashing its expectations.

Vale SA (VALE5), the world’s largest iron-ore producer, had its credit rating cut by Standard & Poor’s for the first time in more than eight years as a drop in the price of the commodity boosts the company’s debt burden.
S&P reduced its rating on Rio de Janeiro-based Vale one step to BBB+, the third-lowest investment grade, saying in a statement that the weakness in the iron-ore market will erode the company’s ability to generate cash. This marks the first time S&P has cut its rating on Vale’s long-term foreign debt since October 2006, according to data compiled by Bloomberg.

Goldman analyst Christian Lelong said it would take a long time for the market to work through coming expansions from BHP and Rio, which will remain highly profitable. “Balancing the market in the face of slowing demand and strong supply growth will result in a long war of attrition at the top end of the cost curve that we expect should continue beyond 2016,” Mr Lelong said in a report to clients. A global iron ore glut is set to widen from 47 million tons this year to 260 million tons by 2018 as low-cost supplies are expanded further.

According to Goldman, iron ore will likely average $US66 a tonne this year, a sharp cut to its previous forecast of $US80 a tonne. The commodity is then expected to extend falls in 2016, sinking to an average price of $US61 a tonne as an oversupply continues to drag on the market. Global production of iron ore rose by an annual average of over 6% from 2010 to 2014 despite the fall in prices and is set to expand even further this year.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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