Iron Ore: An Expanding Glut Fuels 50% Price Decline

January 12, 2015


Survival Of The Fittest

In West Africa, London Mining has already gone bankrupt. At the beginning of December, it was announced that, albeit not bankrupt, Sierra Leone's African Minerals' "operations" would be "put on care and maintenance," and "[c]ontrolled shut down initiated at operations in Sierra Leone due to insufficient working capital, severely impacted by low iron ore prices, which has prevented implementation of cost reduction strategies."

In October, MMX Mineracao e Metalicos SA, an iron ore mining company controlled by Brazilian tycoon Eike Batista, had filed for bankruptcy protection. And as far away as Scandinavia, Oslo-listed iron ore miner Northland Resources SE, with its most significant resources in Finland and northern Sweden, filed for bankruptcy in early December with debts of more than $650 million.

Even NYSE-quoted Cliffs Natural Resources, the largest iron ore producer in the U.S., has not been immune to rumors of its imminent demise.

But while a number of projects have been either suspended or canceled since midyear and supplies reduced in some producers, the likes of low-cost Gina Rinehart, for example, with her $8 billion Roh Hill mine project in Pilbara, continue to expand.

What Does The Future Hold?

With well in excess of $100 billion having been spent on mine expansion since 2011, there seems to be little incentive, as yet, for the low-cost producers to cut back production any time soon. According to Bloomberg Intelligence, even at current pricing levels, more than 80 percent of global production remains profitable.

Indeed, Goldman Sachs believes that enough producers are making money for the global surplus to extend for a further four years, and that it will reach some 300 million tons by 2017.

The big question now is: What will the Chinese mines do? Opinion appears to be divided as to the answer. The cuts that there have been in production have led some to believe that further cuts will soon be forthcoming. Others believe that prices will have to fall further before there are any really meaningful cuts. Even if, as one Shanghai-based fund manager was quoted recently, half the mines in China are not profitable.

Whatever may happen in China, however, what can be said with a degree of certainty is that for the higher-cost—and smaller—producers, even with substantially reduced fuel prices, life is going to continue to be very tough.

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