While much of the attention among commodity price followers has been focused on the oil price, the same movie has been playing in iron ore. With a price down to its lowest in five years, producers are slashing production with almost two dozen mines cancelled or suspended. The cure for a low oil price, OPEC believes, is a low oil price. Far-sighted investors could be mulling the same should hold true for iron ore miners. – AH
By Tim Loh
(Bloomberg) — Iron-ore producers have canceled 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 metric tons of extra capacity won’t 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 5 percent a year, the global iron-ore market would be in deficit by 2018, Hoffman said yesterday in a report.
The price of the steelmaking ingredient delivered in Qingdao, China, fell 1.6 percent to $66.84 a dry metric ton yesterday, according to Metal Bulletin data, the lowest since June 2, 2009. The price is down 50 percent this year.
More than 100 million tons of new capacity has entered the market since July, and that’s 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 Inc. said it won’t pursue an expansion of its Bloom Lake mine in Canada and may close the operation.
Brazil, Australia
About 95 percent 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, more than 80 percent 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 also outlined a bearish base case in which demand contracts 2 percent annually as China transitions from an economy driven by construction to one powered by services and manufacturing. In that case, Chinese steel demand may have already peaked in 2013 and “the world would be awash in iron ore for the foreseeable future,” Hoffman said. – BLOOMBERG
