Benchmark 62% spot iron ore entered China's Golden Week holiday at $104.20 a tonne recovering from the worst quarterly performance in history and a three-and-a-half year low of $86.70.
Iron ore first crossed $120 at the start of 2010 and apart from a week in July of that year and all of two trading days in October 2011, the commodity never dipped below that level until July 25 2012.
There were dips and recoveries over that time – iron ore hit an all time record in February last year of over $190 and famously eight months later suffered a $60 drop over the space of 28 days.
Thanks to China's dominance of the market $120 provided a strong price floor for traders and became a rule of thumb in the industry, but 10 weeks below this level and the conventional wisdom is being sorely tested.
Chinese mills almost forge more steel than the rest of the world combined and given the appalling profitability of the country's steel industry (they make US26c per tonne!) you'd think the lower the price, the better for China.
Not necessarily, argues FT.com (sub required). Whatever the new floor turns out to be – and it seems more and more unlikely that it will be as robust as $120 – China has an interest in seeing that it does not go too low:
China still sucks in the stuff, albeit more slowly. And it is happy with the rate: a low price is not in its short term interests. That is because, as well as being the world’s biggest consumer, China is also a producer. Its myriad small miners, which already contend with low-grade deposits, are less efficient than global peers. Spot prices of $90-$100/t in 2008 had half of China’s iron ore industry running at a loss, notes Raw Materials Group. Their cost today is between $80-$170/t.
For comparison, it costs BHP and Rio between $40-$50/t to land ore in China. Chinese ore output could fall from last year’s 320m tonnes to 120m-200m in 2020, RMG estimates.
Neither is the outlook for China's mines getting any better. The iron content of domestic ore currently stands at only 20%, down significantly from 30% in 2004 and on its way to 15% according to research by investment bank Standard Chartered.
The outlook for iron ore has certainly become more clouded since July, but some of the more bearish analysts may be overshooting on the downside – particularly those that see $50 a tonne by mid-2013.
Last month a Chinese industry body said roughly 40% of domestic producers have already suspended production – and that's with a price in triple digits. Would China simply let its hundreds of iron ore mines go out of business?