Forget gold, IRON ORE is the story of the decade

Then at the end of 2004 all hell (for Chinese steelmakers that is) broke loose. The Big 3 decided enough is enough and put up the price 72%, marking the start of a supercycle and the beginning of the end of the old pricing system:

Although October last year constituted a mini-crash with spot declining from a record high of $180 to $116, on Friday it was back up above $140. Reuters reports futures prices of nearby months remained at a premium, “reflecting widespread anticipation of an improvement in spot ore prices once Chinese buyers return from the week-long break,” according to reference price provider Steel Index.

Chim points out that the dramatic rise since the beginning of 2008 were into the teeth of the financial crisis and despite prices that went up four-fold in four years, Chinese steelmakers continued to buy. China now imports 60% – 70% of its needs, up from $35%, because of low grade domestic stock from expensive underground mining. Iron ore producers also benefit from industry concentration and pricing power compared to a highly fragmented steelmaking industry.

Steel production is closely correlated to economic growth and personal incomes. Using that metric China’s citizens have to increase their personal incomes almost 10-fold to catch up with the US where GDP per capita income is $48 000. Given the firepower the Chinese government still has to stimulate the economy – the country’s reserves are more than $3 trillion and 20 times that of the US – and its ambitious infrastructure programs (among others 36 million new housing units), it still has some way to grow:

Chim also provides interesting stats for those who believe the China boom is coming to a close. There is plenty of opportunity left in the region. India is where China was 20 years ago while the other Asian economies that are doing well – Indonesia, Vietnam, Thailand, Philippines and others – constitute a 500 million population pool:

And for those who think iron ore is only an Australian story, Canada’s miners have attracted $10 billion in the past year through acquisitions, investments and expansions:

It’s not all good news however. New supply coming on stream from 2014 – BHP and Rio’s output plans for Pilbara alone are a staggering 750 million Mtpa and just this week BHP committed another $14 billion to expand its port – must impact prices. Rio’s chief Tom Albanese in December said he sees one more year of $120-plus iron ore – then it’s over.

Thanks to their economies of scale the Big 3 have been flooding the market by concentrating on building market share rather than maximizing prices. This way the giants drive high-cost producers out of the business. The Big 3 can handle a price well below $120; smaller players may become collateral damage as peak profitability in the sector passes.

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