Iron Ore Tests Floor as Plunge to $90 a Ton Puts Mines at Risk

Bloomberg News
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(Bloomberg) -- Iron ore’s plunge is about to test the view that the steelmaking material can find solid price support at $90 a ton or more as high-cost mines are nudged out of the market.

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Futures in Singapore briefly sank below $90 earlier this week to their lowest in almost two years, as China’s steel slowdown leaves the market awash with too much of the raw material. Prices have slumped by about a third this year, fueling discussion about how low they must go to force mine closures and bring supply back in line with demand.

Global mining giants like BHP Group Ltd. and Rio Tinto Group in Australia and Brazil’s Vale SA dominate supplies and are unlikely to curtail output because of their huge economies of scale and low costs. But the price rout threatens more marginal producers — especially in India, but also among smaller outfits from Brazil to Mongolia.

“We need to eliminate about 100 million tons to balance this market, and to do that we need prices to settle in the $80s,” said Ian Roper, analyst at Kallanish Consulting Services, who previously worked at Macquarie Bank Ltd. and for Rio Tinto in China. “Cost support is in the $80s, not in the $90s, and certainly nowhere near $100 a ton.”

China is the world’s biggest buyer of iron ore, importing nearly 1.2 billion tons last year for steelmaking, but that industry is in a profound slump due to the ongoing crisis in the nation’s property market.

It’s now widely accepted that China’s steel output has probably peaked, and a sharp slowdown in construction activity this year has piled pressure on the raw material. There’s about 150 million tons of ore sitting in Chinese ports, the highest-ever for the season, which is adding to the headwinds.

BHP has argued that any dips below $100 are unlikely to last long because of the large chunk of supply that will come under pressure below that threshold. A more decisive pick-up in Chinese steel demand after the summer lull could also support prices.

“We expect some supply response to take place in the next month or so, for example from Brazil and India,” said Erik Hedborg, principal analyst at consultancy CRU Group. “We see a lot of opportunistic, low-grade exports from these two countries, and our view is that this is the type of supply that will go away very quickly when market conditions are weak.”

India has long been the major so-called swing supplier of iron ore for China’s giant steel industry, with shipments rising and falling according to demand. China’s domestic mines used to be highly sensitive to prices, but they’re less of a factor now because supply has contracted and most mines are controlled by state-owned mills, Kallanish’s Roper said.

Still, some minor producers won’t respond readily to price changes, said Chen Guanyin, an analyst with Mysteel Global, especially if their countries rely on export revenues. Supply from Chinese-owned mines overseas — investments to reduce the nation’s reliance on other imports — is also likely to be secure, he said.

“Many people in the market have been overly optimistic that iron ore will see support at $90,” said Chen.

On the Wire

Chinese billionaire Xiang Guangda’s battery company is hunting for more US investment opportunities despite mounting geopolitical tension between the world’s economic juggernauts.

In May, China’s central government urged more than 200 cities to buy unsold homes to ease oversupply. More than three months later, only 29 have heeded the call.

Tumbling crude oil prices is the latest signal that the world is feeling the spillover effect from China’s ongoing economic problems.

The Canadian government has started a 30-day consultation on potential new tariffs on Chinese products including batteries and battery parts, semiconductors, solar products and critical minerals.

The Week’s Diary

(All times Beijing unless noted.)

Wednesday, Sept. 11:

  • China to release Aug. aggregate finance & money supply by Sept. 15

  • CCTD’s weekly online briefing on Chinese coal, 15:00

  • Summit on China’s Belt and Road initiative in Hong Kong

  • Meeting of China’s National People’s Congress standing committee in Beijing

Thursday, Sept. 12:

  • China’s monthly CASDE crop supply-demand report

  • Summit on China’s Belt and Road initiative in Hong Kong

  • Meeting of China’s National People’s Congress standing committee in Beijing

Friday, Sept. 13:

  • China weekly iron ore port stockpiles

  • Shanghai exchange weekly commodities inventory, ~15:00

  • Meeting of China’s National People’s Congress standing committee in Beijing

Saturday, Sept. 14

  • China new home prices for August, 09:30

  • China industrial output for August, including steel & aluminum; coal, gas & power generation; and crude oil & refining. 10:00

    • Retail sales, fixed assets investment, property investment, residential sales, jobless rate

--With assistance from Winnie Zhu and Paul-Alain Hunt.

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