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Who's to blame for the iron ore price crash?

06 November 2015
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Analysts believe that prices of iron ore will fall again due to the unfavorable global trends (market oversupplied with raw material, reduced consumption).


According to recent data, the price of iron ore for delivery to the Chinese port of Tianjin, decreased to its lowest value since July this year, and amounts to 48.70 US dollars per ton, which is the price lower by almost a third comparing to the price at the beginning of the year. With return of negative trend, concern of the market participants seriously increased, that the price could break through the historically lowest value.


Leaders in this market warn that we should all prepare for a long period of (very) low prices of iron ore. There are no indications that the situation will alter in the next few years. Demand will remain low, while the market will be flooded with too much iron ore production. This pressure will push prices lower and lower until it reaches a turning point.

How did the iron ore even come to the such unfavourable position?
Many would say it's because of China. Indeed, the country that produces about 46% of the world's steel and consumes about three-quarters of iron ore transported by sea, is one of the factors that brought down the price. It is important to notice - a factor that brought down the price, but not influencing it any more to such extent as it is believed. The years of Chinese growth helped the development of large manufacturing capacities that spend huge amounts of raw materials. With the slowing down of economic growth, this consumption fell. Some sources say that in the coming months, China's steel production will fall by up to 20%. And that's it, here the influence of China stops.

Iron ore price trend

It would be logical to expect that suppliers faced with declining demand reduce their production - but that did not happen.

Large mining companies did not reduce the extraction of iron ore, but on the contrary, they increased it. According to the latest report for the third quarter, the three major Australian mining company Rio Tinto, BHP Billiton and Fortescue Metals produced a record high 193 million tons of iron ore, an increase of 8.5% compared to last year. It is obvious that they have no intetion to reduce production.

Similar information comes from the world's largest producer of iron ore – the company Vale. When the new production facilities are completed next year, their production would increase more and costs will decrease. Some sources believe that BHP, Rio Tinto and Vale need around $ 12-13 to produce one ton of iron ore. With the increased capacity that amount could next year drop to $ 10/t.

 

So who's to blame for low iron orne pice?

We can easily conclude that the leading producers of iron ore will continue to move in this direction as long as they have the sale revenues, and there is still enough space. They don't care they are threatened by investigative committees, on the contrary, by this pricing policy they could get rid off a large number of competitors and so silence the big number of critics. 

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