Iron ore market is turning ever more ugly - Andy Home
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Reuters reported that the iron ore market is turning ever more ugly. The price of ore for immediate delivery to China’s Tianjin port is currently assessed by The Steel Index at USD 54.50 per tonne. That’s a record low or at least the lowest since TSI started tracking the spot price back in October 2008.
Such a cataclysmic collapse was never in the script. Sure, price weakness was expected. How could it not be when the world’s biggest producers were collectively bringing so much new capacity on stream? But no one expected this sort of carnage.
The two central tenets of the iron ore producer faith are crumbling before their eyes. The first was that Chinese steel production, and therefore Chinese iron ore buying, had years of steady growth ahead of it.
Peak steel was pencilled in for the next decade, an assessment that looks ever more questionable as China’s steel producers reel from a toxic mix of slowing demand from the property sector, an environmental clamp down and relentless margin pressure.
The second was that new, lower cost supply would neatly displace higher cost producers, bringing the market back into balance. This cost curve argument has been used by all the big three majors, Rio Tinto, BHP Billiton and Vale, to justify to shareholders why they are bringing on more production at the time when Chinese demand for their product is looking decidedly shaky. It too, though, is now starting to look highly problematic.
Only eight months ago, when the iron ore price had just fallen through the USD 100 per ton level, analysts at Macquarie Bank put out a research note with the reassuring title: Orderly iron ore displacement increases confidence in the cost curve.
The problem is that in the space of the intervening eight months the iron ore cost curve has flattened to the point that it’s less of a curve, more of a gently rising slope.
In part this is due to the efficient closure of supply sitting at the top end of the curve, particularly that part coming from the small independent production sector in China itself.
Such swing supply had been seen to exit before on price weakness, explaining why Macquarie back in July could confidently claim that with the relatively rapid exit of supply as prices fell, the veracity of the cost curve data has been tested and validated. But what analysts at CRU term the low hanging fruit has now gone.
Everyone else, meanwhile, has been slashing costs, a process aided and abetted by the depreciation of key producer currencies and tumbling freight rates.
The cumulative result, Macquarie now concedes, is that with everyone doing the same thing, the net effect has been a significantly lower cost curve but limited change in supply to the wider market. So the cost curve has changed shape. It is now both flatter and lower, attesting to the sort of fluid dynamics highlighted by Liberum.
Source - Reuters
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