Iron ore price 16% rally off decade low comes to abrupt halt
After falling to a near decade low of $37 a tonne on 11 December, the iron ore price clawed back 16% without registering a single down day to open 2016 trading at $43.10.
That rally came to an abrupt halt on Tuesday with the Northern China 62% Fe import price including freight and insurance (CFR) losing 2.3%.
The bad news out of China that roiled equities and metals prices finally caught up with the steelmaking raw material. And with no change to the fundamentals for the industry it's hard to see why iron ore would continue to climb.
Port inventories in China, responsible for more than 70% of the seaborne trade, are piling up again. China’s iron ore demand is set to fall by 4.2% in 2016 to just over 1 billion tonnes according to the country's Metallurgical Industry Planning and Research Institute as steel production shrinks 3.1%.
While the demand picture is certainly not pretty, the main driver of a lower iron ore price has been growing supply.
In December, Australia's 55mtpa Roy Hill mine started shipments. Rio Tinto's 20mtpa Silvergrass mine could be up and running within a year and Vale's gigantic 95mtpa S11D project could follow soon after.
Many smaller producers have exited the market and others are "hanging on by their fingernails" in the inimitable words of Rio CEO Sam Walsh, but there are now also signs that the majors, which still enjoy healthy margins at today's price, may be throttling production.
Vale cut its iron ore production guidance for this year to 340–350mt from a previous forecast of 376mt and the Rio de Janeiro-based company also said it may slow down the S11D expansion. Anglo American is doing the same at Minas Rio, announcing the ramp up to 26mtpa will only happen in 2018. Kumba is cutting production at Sishen in South Africa by nearly 30% to 26mt.
Morgan Stanley in a research report quoted by Bloomberg noted that with more than three-quarters of global supply in the hands of just four companies "with unprecedented pricing power", it may be time for the majors to change tack:
“What’s needed to buoy the ore price? Vale, Rio Tinto, BHP Billiton to end their competitive supply surge and act more rationally in this weakened market,” analysts Tom Price and Joel Crane wrote. “Vale’s the last to deliver big tons to the market: if a moderation of its supply-growth strategy is followed by the Australians, this will secure a price above that of market expectations.”