SINGAPORE – (Reuters) – Iron ore is veering to a new crisis as prices for future delivery of the commodity slide 30 percent in the space of a month, and its outlook is now more bearish than oil and more dire than ever for miners struggling to just stay in business.
Prices of the steel-making ingredient for immediate delivery have slumped 60 percent over the past year as demand particularly from China slowed rapidly.
Despite the crumbling cash market, miners had been able to hedge future production at prices well above spot levels. Indeed, a month ago, miners could still sell 2017 output at close to $70 a tonne even as April 2015 prices fell below $60 for the first time in more than five years.
Forward iron ore prices have since tumbled below $47 for deliveries all the way until the end of 2017, depriving nearly all miners of any chance of establishing hedges at or above breakeven levels during that period.
A combination of factors brought about the recent capitulation in forward prices, most notably news that China plans to subsidise its iron ore sector to protect its flagging steel industry. Subsidies would help keep mines open and keep supplies flowing.
Aggressive shipments from Australian and Brazilian exporters have also weighed on forward prices.
As prices fall even further, “it will be an issue of cash flow, and those miners without the cash to ride out the storm are going to go under,” said Jeremy Platt, analyst at London-based steel consultancy MEPS.
Only three of the world’s top 10 largest iron ore miners are estimated to remain profitable at those prices, with Rio Tinto (RIO.AX) and BHP Billiton (BHP.AX) projected to have breakeven costs of around $35-36 a tonne and Fortescue estimated at around $44 a tonne, according to UBS.
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