In Commodity News 06/04/2015
China and Australia, two economic powerhouses on opposite sides of the supply-demand equation, are critical to iron ore’s recovery—and by most accounts it may be a lost cause.
Iron-ore prices are in a free fall as slow demand in China for the mineral—and steel, which is often the end product—as well as a supply glut driven in part by rising production in Australia, continue to weigh on iron ore.
“The apparent loss of investment confidence in China’s broader industry is exaggerating the bearish impact of Australia’s ongoing supply growth,” economists at Morgan Stanley wrote in a recent report.
China’s economy grew 7.4% in 2014, the lowest in 24 years, resulting in a drop in steel consumption, a first since 1995. Chinese officials are targeting gross domestic product growth of “around 7%” this year.
“We have been forecasting for some time that prices would fall sharply but the scale and pace of the recent decline has taken even us by surprise,” said Caroline Bain, senior commodities economist at Capital Economics, recently.
Prices for iron ore dropped to $46.70 a ton Thursday, down 75% from their high of $190 a ton in 2011, according to The Wall Street Journal, citing data from The Steel Index.
“Low-cost supply from Australia and Brazil continues to come online as RIO, BHP, and VALE are unfazed by the drop in prices and are continuing with expansion plans,” said analyst Anthony Rizzuto at Cowen and Co.
But despite the pervasive worries about weak prices, supply woes are not likely to disappear soon and pose a risk to the iron-ore market going forward.
“The big 4 iron-ore producers—Vale, BHP Billiton, Rio Tinto and Fortescue—have made it clear that their plan is to ramp up supply and force the closure of higher-cost output elsewhere, particularly in China,” said Bain.
That can only lead to greater price pressure, which is not expected to abate until China’s economic growth picks up pace again.
