The world’s largest iron ore producers are moving in the right direction by continuing to increase output even as demand cooled in top consumer China, sending prices tumbling and leaving smaller, high-cost producers struggling to survive.
That seems to be the main conclusion of experts from Goldman Sachs Group, which wrote in a report Wednesday that “efforts to support prices via voluntary production cuts would be counter-productive,” as quoted by Bloomberg.
While such cutbacks are appealing in theory, any such proposal is misguided, according to Goldman’s analyst Christian Lelong.
Brazil’s Vale (NYSE:VALE), BHP Billiton (ASX:BHP) and Rio Tinto (LON:RIO), the report argues, are unlikely to create a cartel and agree on output cuts to stabilize prices, with waning demand expected to increase competition.
“First, production cuts would go against the prevailing trend of improving efficiency,” Lelong wrote. “Second, the required coordination among dominant producers with different incentives would be more difficult to achieve among three companies; successful cartels in oil and potash have featured only one or two dominant producers.”
Glencore (LON:GLEN) chief executive Ivan Glasenberg and Fortescue’s Metals Group (ASX:FMG) boss Andrew Forrest, among several others, have warned that oversupplying markets regardless of demand was damaging the industry’s credibility.
Prices for the steel making material hit $46.70 a tonne in April, the lowest in a decade, though they have picked up since then to around $62 this week.
Goldman expects the iron ore “war of attrition” will continue while prices gradually decline toward its $40 per metric ton forecast by 2017.