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COLUMN-Iron ore reality check shows small, but significant change: Russell

--Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, May 4 (Reuters) - It's time for a reality check all round in the iron ore market.

In recent weeks there has been a strong rally in prices, tentative signs that the headlong expansion of capacity will be reined in, calls for a producer cartel of some sorts and a small miner scrappily hanging on in the face of seemingly overwhelming adversity.

All of this makes for great drama and news headlines, but also should lead to questions and analysis as to whether anything has actually changed in the iron ore market.

The first reality check is that despite the near 27 percent rally in the spot Asian iron ore price between April 6 and April 27, the price remains extremely weak.

Iron ore ended last week at $56.20 a tonne, having retreated from the $59.20 reached on April 27, leaving the steel-making ingredient down 21 percent so far this year.

It's also roughly half of what it was this time last year and not much better than a quarter of the record $191.90 a tonne in February 2011.

The price is also still well below the median estimate of $68 a tonne forecast for 2015 by analysts polled by Reuters in January.

What this shows is that even a strong rally in prices hasn't really been enough to lift iron ore out of the doldrums.

The main message from April's gains is that a price floor may have been found, at least for now.

Whether prices can continue to rise will depend on how much new supply hits an already saturated market.

This brings us to the second reality check, namely that the big miners are finally starting to show supply discipline.

BHP Billiton (NYSE: BBL - news) was first cab off the rank, slipping into its latest quarterly output report a couple of lines to the effect that it was deferring expanding its output to 290 million tonnes.

A delay in adding 20 million tonnes in the future from an already massively oversupplied market seems in itself a weak reason for a rally in prices, but the market decided that what was happening was a shift in sentiment, and in the context of relentless increases in supply, this was significant.

BHP Billiton, the third-biggest producer, will still boost its capacity to 270 million tonnes by 2017 from 250 million in 2015, so the ultimate message is more tonnes are still coming.


It's much the same story with last week's announcement by Brazil's Vale, the top producer, that it may reduce the increase in its output by 30 million tonnes over the next two years.

That sounds more substantial until one realises that what Vale is doing is keeping its overall annual capacity at 450 million tonnes and may reduce some of the higher-cost output within this, replacing it with newer, lower-cost production.

While this may help boost the bottom line of loss-making Vale, it will do precious little to alleviate the market surplus in iron ore.

The second-biggest miner, Rio Tinto (Xetra: 855018 - news) , has so far given no indication it wants to slow its expansion, saying it aims to produce 350 million tonnes this year.

With the start-up of the 56-million tonne a year Roy Hill mine in Western Australia state later this year, it becomes abundantly clear that there are still substantial amounts of new capacity in the pipeline.

This alone would call into question whether any rally in iron ore prices is sustainable, especially when the new output tries to find buyers.

And this brings us to another reality check, namely that even a modest increase in price, as seen last month, means more production will stay in the market, thus thwarting the stated aim of the big miners to drive competitors to the wall.

Atlas Iron, a small Australian producer, resumed output at two mines on the back of higher prices and the support of its contractors.

Atlas aims to mine 13 million tonnes this year, making it a minnow compared to Rio Tinto and BHP Billiton, but the fact that it has decided to continue operations shows that it feels it can make money even if iron ore prices remain low.

This confirms that iron ore production is probably more sticky than the big three miners thought it would be when they decided to flood the market with their low-cost ore.

So, has anything actually changed in the iron ore market in the past few weeks?

It may be a small amount of tonnes in absolute terms, but the slowing of planned output increases by two of the three big miners may just be the start of a trend, a belated recognition that the Chinese and other buyers can't actually absorb all the iron ore that is coming to market.

While this doesn't alter the fact that the iron ore market is still hugely oversupplied, it does make it likely that the surplus will stop growing, and will eventually start to ease. (Editing by Richard Pullin)

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