This week the price for iron ore has dropped to its lowest level since July, and the price for iron has dropped 27% this year overall. The price benchmark set at China’s Tianjin port is at $52.10/ton, with some analysts believing that the price will drop further to around $50 by the end of this year (CNBC). The primary reason for the current worldwide drop in price is due to the decrease of demand in China, which forced the price of steel rebar to record lows. For comparison, the price of iron ore was $185/ton in 2011 due to the constant demand from Chinese expansion in construction at that point in time (MetalJunction). As the market is looking to drop even further in 2016—down to $40/ton by some estimates—the global steel industry prepares for its bearish prospects in the near future as Chinese construction maintains its slow pace.
Another contributing reason for the dropping price is the continual increase of production from low-cost iron ore producers, who are forced to export their goods due to the already low demand within their home countries. BHP Billiton, the #3 iron ore producer in the world and based out of Australia, increased its production 7 percent for September and is set to hit its previously set goal of increasing its 2015 production by 6 percent. In addition, the Indian mining company known as Vendata also expects an increase in exports of over 5.5 Million tons, most of which analysts believe will eventually find its way into China. The glut of material in the international market and the drop in worldwide demand combine to form the cycle of collapsing prices.
The price is not due to recover until the third quarter of 2016, as that is when a new round of major Chinese construction projects are set to begin. However, as low-cost producers continue to increase their output, the glut could absorb this new demand, preventing the expected rebound in pricing. Low-cost iron ore producers are better able to survive the current drop in prices due to their inherent efficiency, but the downside is that the bear market is prohibitive to iron-dependent industries such as steel, unless those affected businesses are also following a cost-efficient model. If the price makes its expected recovery in 2016, this will create opportunities for companies using more premium pricing, providing much needed balance to the market.
