Iron ore price slumps to near 5 year low

From The Steel Index:

Spot market prices for high quality iron ore fines fell to their lowest level in nearly five years yesterday as deteriorating conditions in China's steel market were manifested in weaker demand for the steelmaking ingredient. TSI's 62% Fe iron ore fines benchmark price fell a dollar to US$85.70/dry metric tonne, CFR Tianjin port, China on September 3, taking it to its lowest level since October 8, 2009, when the price stood at US$84.60/dmt.

After a rapid ramp-up in supply from major iron ore mining companies, who have banked on continued strong demand from China off the back of continued urbanisation and infrastructure development, the iron ore market moved into oversupply in the past year. With China's economy entering a slower phase of growth, the additional tonnes have come at a bad time. Many of the country's steelmakers are now struggling to sell their finished goods into an oversupplied market, as demand from construction and other steel-intensive sectors tapers off – a problem only made worse during the typically slow summer season when Chinese construction winds down.

The price of iron ore has slipped steadily since the beginning of the year. TSI's 62% Fe benchmark fines price for Chinese imports dipped below US$100/dmt on May 16, where it has since remained. The price of 58% Fe fines has fallen at an even sharper rate, particularly in May and early June, when the gap between this lower-grade material and the more oft-cited 62% Fe grade expanded to as much as 20%. This compared to an average disparity of just 8% over the whole of 2013, reflecting the relatively large increase in supply of ores with lower Fe content.

Iron ore prices have come under renewed pressure at the start of this month after a steady decline through August, as worries over the financial health of a number of mills in China gathered pace. With steel prices still in a downward spiral, cash flow at several medium-sized mills has been squeezed. Rumours abound of producers suspending operations, or even facing bankruptcy. Previously, many producers were encouraged to ramp-up output as lower raw materials reduced their costs and opened up margins. However, despite iron ore prices dropping to historical lows, steelmakers' margins are starting to look precarious as oversupply has sent their finished product prices plunging too.