Iron ore spot price drops to record low

The spot price of iron ore entered uncharted territory on Friday with the steelmaking raw material suffering a second day of heavy losses falling to the lowest since the inception of the benchmark.

The 62% Fe import price including freight and insurance at the Chinese port of Tianjin lost $1.10 or 1.9% to $58.20 a tonne on Friday, following Thursday's 4.5% drop .

After almost halving in 2014, the price of iron ore is now down more than 20% this year. Friday's peg was the lowest price since November 2008 when The SteelIndex, a unit of Platts, first started tracking the spot price.

Before the emergence of quarterly contract pricing and eventually a spot price, the seaborne trade was controlled by the Big 3 producers – Vale, Rio Tinto and BHP Billiton – which set prices during secretive negotiations with Japanese steelmakers and signed annual contracts.

The annual contract price of iron ore had never strayed far from $10 – $14 per tonne since the 1970s (1991 was a banner year – miners got all of $15.03 for their haul). Then at the end of 2004 all hell (for Chinese steelmakers that is) broke loose.

After months of tough – often acrimonious – benchmark negotiations, the 2005 price was hiked a whopping 71.5%, marking the start of a supercycle and the beginning of the end of the old pricing system. But a tonne of ore was still only $28.11.

From 2005 onwards signs of ore shortages were everywhere as China's 500 licensed importers chased tonnage on the sidelines of the global trade and buy fines for as much as three times the benchmark contract price, still pegged at less than $40.

During 2008 negotiations the contract price was upped 68%, but the majors continued to lose out on billions under annual contract pricing. Growing Chinese port stockpiles saw action in the industry shift to mills and traders, ushering in the era of rapidly rising and volatile prices.

In a push by BHP Billiton CEO Marius Kloppers (against the wishes of his larger competitors), 2009 saw the collapse of the old benchmark system and at the same time a move away from a free-on-board pricing system to one where miners accept freight costs.

The spot price scaled $100 for the first time in November 2009 and on February 16 2011 reached an all-time high of $191.90 a tonne.