Iron ore prices slump owing to huge global surplus

Iron ore prices dropped to the lowest since 2009; in China, steel demand is shrinking and mines are closing, but hopes are pinned on urban growth and hence larger steel demand, as Chinese urban population is growing.

Prices of iron ore hit their lowest level since 2009, dropping by 36 percent. In China, which purchases 67 percent of iron ore supply borne by air, steel demand is slumping as well. There are also new capacities for iron ore production in Australia and Brazil. A substantial surplus has been created, so Goldman Sachs forecasts the amounts will increase by over twofold in 2015, to 175 million metric tons.

The price of 62 percent iron content ore delivered to the Qingdao port in China slumped to the lowest level since October 2009, $86.09 per ton, yesterday. In general, prices fall short by 55 percent of the February 2011 record of $191.70. But the biggest producers are not in the red yet.

The top supplier is Vale, followed by Rio Tinto, which plans to raise output to over 330 million tons in 2015; this year, it advanced by 11 percent, to 295 million tons. Vale’s boosting of production will reach 348 million tons in 2015, an 8.4 percent increase. Profit margins are being squeezed, but larger-cost companies will have to reduce output first.

On a global scale at current prices, it is break-even or loss-making for a quarter of the supply, so cuts are being implemented. But it may take time for high-cost production to withdraw from the market.

Goldman Sachs’s expectations are bearish. Further price declines may set in, and iron ore is projected to slump to $75 in 2015, which is 13 percent below present levels.

Seaborne supply of iron ore is strong and consumption lags behind. An excess is building up, which will be translated in a price decline. At ports in China, inventories rose by 28 percent to attain the record 113.7 million tons in July. For next year, global supply is projected to rise by 8.6 percent, 1.44 billion tons, as production in Australia and Brazil expands.

The prospects for steel are soured by the weakening property sector in China. Demand will decline in 2015, to positive 2.7 percent, down from this year’s 3 percent and 2013’s 6.1 percent.

Hopes envisage steel output increase with growing urban development which boosts steel use; 60 percent of Chinese people are predicted to inhabit urban areas by 2020, up from the 50 percent in 2010. In the next decade, steel output is projected to soar to 1.1 billion tons, compared to last year’s 779 million tons.

Despite rising output, mining companies‘ stocks have been on the decline, along with prices. Top producers have been pressing newcomers to the market, fearing their lower cost production which could fetch those new entrants hefty profits.