Iron ore market risks ‘disaster’ – by DOW JONES NEWSWIRES WITH A STAFF REPORTER (The Australian – September 8, 2014)

Mining companies will aggressively pursue increased output in the face of continuing weakness in the iron ore price, though with forecast demand not expected to keep pace with production, one analyst is warnings of a potential “disaster”.

Rio Tinto and BHP Billiton in Australia, and Vale in South America — the world’s top three iron ore miners — are ramping up production in a bet that their enormous efficiencies of scale will allow them to profit, even though prices are now less than half what they were four years ago. The companies are also betting that the lower prices could force higher-cost competitors out of the market, giving them more pricing power in the long run.

The iron ore price has been in a slump for most of the year, with its latest fall on Friday seeing a new five-year low at $US83.60 a tonne.

Already Cliffs Natural Resources has hired bankers to sell its mines in Australia because it has difficulty competing with the major players. “The big three are in control, and there’s not much you can do about it,” Lourenco Goncalves, chief executive of the Cleveland-based company, said in an interview.

The developments are being closely watched by steelmakers in China, South Korea and Japan, the world’s top three importers of iron ore, the key ingredient in making steel. Should the big players, which account for more than 60 per cent of all seaborne trade of the mineral, tighten their control of the market, they could exert greater pressure during price negotiations.

Global output by the top five producers –Vale, BHP, Rio Tinto, Anglo American and Fortescue Metals Group — is expected to grow more than 40 per cent to over 1.5 billion tonnes by 2017, even though demand is expected to grow only 10 per cent to 15 per cent, according to Charles Bradford, who manages a metals research firm. The result is “going to be a disaster,” he said.

During the commodities boom of the last decade, there was enough demand worldwide that mining companies could confidently produce as much as possible and know that infrastructure construction in developing economies would absorb it. Iron ore production has continued to increase even as growth in those markets has slowed, along with demand for steel.

“China will not spend what it’s been spending on infrastructure,” Mark Cutifani, the CEO of Anglo American, said in an interview. “There are still plenty of buildings with no one in them.”

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