Iron Ore’s Recovery Turns to Rust – by Abheek Bhattacharya (Wall Street Journal – July 3, 2015)

Mining firms looking to cash in on higher iron-ore prices are the same ones causing the steelmaking commodity’s downfall

The iron-ore market is discovering why the archenemy of high commodity prices is, well, high commodity prices.

The benchmark price of iron ore has fallen 15% in the past three weeks after hitting its highest level since January, which in turn has sent shares of Australia’s pure iron-ore producer Fortescue Metals tumbling 27%. Signals of high shipments from Australia and poor steel appetite from China suddenly reminded traders of the gulf that exists between supply and demand in this steelmaking ingredient.

Between April and mid-June, traders had pushed up prices nearly 40% because they thought that gulf was closing. One reason: many iron-ore mines were shutting down. Midsize Australian producer Atlas Iron closed its operations while China closed high-cost mines.

But as prices ticked up, Atlas slowly restarted mines, the latest one this week. That amounts to an extra 10 million tons or 1% of supply. China has brought back over 20 million tons, notes Citigroup’s Ivan Szpakowski. There is also the prospect of new supply from Australian mines later this year.

The oil market can sympathize, since higher prices have similarly encouraged U.S. producers to restore supply, only to cause prices to drop. Such encouragement is more problematic for iron ore. Oil fields need constant investment or else production declines quickly, which is why turning off capital expenditure helps rebalance supply.

In contrast, iron-ore mines have longer lives and require little extra spending, meaning it takes tougher decisions—often permanent exits—to do the trick, says Mathew Hodge at Morningstar.

If mining companies such as Fortescue and Atlas can’t take these tough decisions, expect the market to mete out more tough love.

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