(Minews) - Iron-ore prices fell to their lowest level in a decade, amid softening demand from China that boosted concerns about the bottom lines of some of the world’s biggest mining companies.
Recent price declines by this basic ingredient of steel have exceeded even the sharp slide by crude oil, as iron ore fell to $46.70 a ton Thursday, according to data provider Steel Index. That is down 75% from its all-time high of $190 a ton in 2011.
Prices have dropped for six consecutive weeks and have ticked lower 10 out of 13 weeks this year.
Iron ore is among the most common metals mined around the world, and its price is seen as a barometer of industrial growth in developing countries such as China. Supercharged economic growth in China had fueled a boom in demand for iron ore beginning about a decade ago, but a cooling of that country’s industrial engine, along with a glut of iron-ore supplies, has sent prices sliding.
The world’s biggest iron-ore producers—Rio Tinto PLC, BHP Billiton PLC and Vale SA—have continued to pump out huge amounts of iron ore, even as prices have fallen, putting further downward pressure on the market, analysts said.
Charl Malan, who helps manage the $3.4 billion Van Eck Global Hard Assets Fund, said the fund has stayed away from shares of iron-ore producers because of his concerns about this strategy.
“They’re doing this to themselves by just producing, producing and producing,” Mr. Malan said. In recent meetings with executives of big iron-ore companies, he has asked, “Why do you keep producing more and more when there’s clearly weakness in the demand side?”
Shares of Rio Tinto and BHP are down 18% each in the past 12 months, while those of Vale, which is more concentrated in iron ore, have tumbled 45%, according to FactSet.
Futures contracts tied to iron-ore prices in the fourth quarter recently changed hands for $45 a ton, according to Steel Index.
“The price can carry on going lower,” possibly hitting $40 a ton, said John Meyer, an analyst at London mining broker SP Angel.
RBC Capital Markets, which had predicted that iron-ore prices would stabilize this year, reversed its call Wednesday.
“The support for iron-ore prices we had been looking for in late 2014 and early 2015 did not materialize,” RBC said in a note, citing falling demand in China and the oversupply.
The renewed tumble in iron-ore prices helped push the Australian dollar to a new six-year low against the U.S. dollar on Thursday. Iron ore is Australia’s biggest export, and the fall in prices has weighed on the country’s growth and job market. The selloff in iron ore has increased the likelihood of an interest-rate cut by the Reserve Bank of Australia next week, said Stan Shamu, market strategist at IG.
Australia’s benchmark interest rate is higher than that in the U.S. A cut would make the Australian dollar, also called the Aussie, less attractive to investors. Late Thursday in New York, the Aussie was 0.1% lower at US$0.7592. It has weakened 7.1% against the U.S. dollar in 2015 and is down 18% in the past year, according to Tullett Prebon.
The iron-ore situation also raises questions about a survival-of-the-fittest strategy followed by Rio Tinto, BHP Billiton and Vale, some analysts say. They say these giant miners have raced headlong to boost output with the apparent goal of squeezing out weaker operations that produce iron ore at a higher cost.
It is a risky strategy, based on the assumption that high-cost producers will quit the field as prices slip below production costs, leaving the sector largely in the hands of major producers.
That has already played out, to some extent. Iron-ore-producing nations that are at risk of scaling back or have scaled back production include Iran, Canada, the Philippines, Chile and Sierra Leone, according to Jefferies analyst Chris LaFemina.
West African iron-ore output alone is forecast to more than halve to 17 million tons following the bankruptcy filings of two Sierra Leone iron-ore producers, London Mining PLC and African Minerals Ltd., Mr. LaFemina noted.
But big miners are also vulnerable. A $5 dip in iron-ore prices would shave $672 million in annual earnings from BHP and $674 million from Rio Tinto’s net income for the year, according to estimates by Liberum Capital, a London brokerage firm.
Glencore PLC Chief Executive Ivan Glasenberg has been a harsh critic of his competitors, arguing that boosting production in the face of falling prices “cannibalizes” the value of assets in the ground. Glencore, which doesn’t produce iron ore, has cut back on coal production amid sharp declines in prices.
For their part, the big iron-ore producers argue that they are still in a highly profitable business, since it costs them roughly $20 to $30 a ton to dig the ore out of the ground. Fueled by declining costs of production, BHP’s West Australian iron-ore business in the second half of 2014 boasted a healthy operating margin of 49%.
Iron-ore prices averaged $82 a ton during that period, however, 76% higher than current prices.
