LONDON – (Reuters) – The price of spot iron ore has sunk to $75.50 per ton this week, its lowest level since 2009. The scale of the price collapse has been breath-taking. Iron ore has dropped by over 35 percent since the start of the year, a significantly worse performance than any other industrial metal.
But what’s really shocking is that the price is now at a level that until recently was collectively deemed impossibly low. It was only in April that José Carlos Martins, executive officer of ferrous and strategy at Vale, the world’s largest producer of iron ore, told analysts that “one thing is for sure, the price will not go below $110 on a sustainable basis”.
This was not irrational producer exuberance. Martins was only voicing the prevailing consensus view when he went on to argue that “we have many times seen the price going below this level but recovering very fast”. Well, here we are with the price trading not just below $110 but a lot lower still. And sustainably so.
That tells you that something has gone very wrong with the iron ore narrative. This market is in a place it was not supposed to be.
And while big producers such as Vale, Rio Tinto and BHP Billiton are sticking to that narrative, they are now facing the unpredictable consequences of a pricing war they collectively started.
NICE THEORY…
The “big three”, which have some of the lowest-cost operations in the world, are bringing an unprecedented amount of new supply to the market.
Between them they lifted production by almost 12 percent over the first nine months of this year, and the ramp-ups and expansions are continuing.
They all knew that there would be an impact on price, but the theory, as expounded back in April by Vale, was that it would be limited.
After all, they could argue, the market for iron ore will still expand for many more years as the world’s biggest buyer, China, pumps out ever more steel to build infrastructure and new houses.
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