Iron ore price bulls are back

BHP Billiton’s  Mt Whaleback mine

Long held assumptions about the direction and dynamics of the iron ore market have been tested in 2014.

After hitting a high of $158.90 in February, the industry was jolted on March 10, when iron ore suffered the worst one-day decline since the 2008-2009 financial crisis, cratering 8.3% in a single session.

The recovery from there was swift, but by June 16 the steelmaking raw material was sliding again, hitting a near 2-year low of $89 a tonne.

Iron ore has slowly clawed back some of those losses, but remains in danger of trading below $100 on a quarterly basis for the first time since 2009.

On Thursday benchmark Northern China 62% Fe imports retreated slightly to trade at $95.60 a tonne for a 2% gain in July following a positive June that broke a six-month losing streak for the commodity.


After near universal bearishness about the outlook some are calling for a move back above $100. And in short order.

Bloomberg quotes Paul Bloxham, chief Australia economist at HSBC Holdings Plc in Sydney as saying China – which consumes more than two-thirds of the seaborne market – is stepping up purchases:

“Iron ore prices are lifting in part due to a pickup in demand from China. We expect this to continue and for iron ore prices to head above $100 a ton in the near future.”

Key national economic indicators in China remain solid. The world’s second largest economy expanded by 7.5% during the second quarter which compares to 7.4% in Q1.

The rest of the year could be better still. A preliminary survey showed that China’s Manufacturing Purchasing Manager’s Index – a closely followed gauge of economic activity – rose to 52 in July. That’s highest in 18 months.

Apart from a demand boost dwindling domestic supply should also help prices. Between 20% – 30% of mines in China have closed down because low quality ore makes mining at these prices levels unprofitable, according to the China Metallurgical Mining Enterprise Association.

According to Credit Suisse 62%-equivalent domestic production will decline 16% to 310 million tonnes this year and drop again in 2015 to 275 million tonnes.

A move back above $100 may not be enough for smaller producers outside China however as the big three flood the market with ore produced at as little $25-$35 a tonne.

Output at BHP Billiton (LON:BHP), the world’s third largest producer, jumped 19% to 56.6 million tonnes in the three months to June. The company is on track to produce 245 million tonnes for the year.

Rio Tinto (LON:RIO) boosted production 11% to 57.5 million during the quarter and is on course to up annual production to 290 million tonnes.

After a slow 2013, top producer Vale (NYSE:VALE) is also hitting a higher gear with output rising 13% to 79.4 million tonnes over the same period. Vale’s longer term target is 400 million tonnes a year as its giant S11 expansion comes on stream.

Australia’s government forecaster predicts that by 2015 top producers will account for 83% or 1.15 billion tonnes of the global seaborne trade, displacing smaller rivals.

Reuters reports a number of miners have already fallen by the wayside including Sweden’s Northland Resources, Australia’s Cairn Hill and Canada’s Labrador Iron Mines:

“Iron ore is fast becoming a big boys game, with little room for the small or marginal producer,” says Gavin Wendt of Australian consultancy MineLife.

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