Iron ore price drops to 3-month low

On Friday the benchmark 62% Fe import price including freight and insurance at the Chinese port of Tianjin slid 1% to $50.90 a tonne, the lowest in three months and down 8% in two weeks according to data provided by The SteelIndex. In July, the steelmaking raw material on a spot price basis, fell to a record low of $44.10.

The People’s Bank of China cut benchmark interest rates by 25 basis points to 4.35% and in an effort to stimulate lending lowered banks’ required reserve ratio for the sixth time on Friday.

The attempts to re-ignite infrastructure spending is coming too late for China’s steel industry which forges almost as much as the rest of the wold combined and accounts for more than 70% of the world’s seaborne iron ore trade.

Crude steel output in the country continued to shrink in September, down 3% to 66m tonnes, as mills struggle to remain profitable amid a saturated domestic market. Year to crude steel output totalled 609m tonnes, a 2.1% decline. The World Steel Organization, last week forecast that steel demand in China is expected to decrease by -3.5% in 2015 and -2.0% in 2016, after hitting a demand peak in 2013.

While moderating demand in China can take the blame for the recent weakness, a  surge in supply will likely push prices down further towards the end of the year and next.

Iron ore miners invested north of $100 billion in new projects and expansions since the start of the decade and most of those projects are now delivering or will do so soon.

The big three producers are following a scorched earth policy of raising output and slashing costs to weather low prices and push out competitors.

This week top producer Vale announced record third quarter shipments of 88 million tonnes despite idling 13 million tonnes worth of high cost operations. More astonishing is the fact that the Rio de Janeiro-based company was able to reduce cash costs to just $12.70 per tonne (it’s in the high teens at Rio Tinto and BHP).

Vale is not stopping there, its 90 million tonnes per year S11D expansion in the Amazon is 75% complete and according to the company that could push costs below $10 a tonne.

After a near 15% year-on-year surge in output in the third quarter Rio is well on its way to reach 360 million tonnes in the next few years, while BHP Billiton which grew production 6% last quarter  is on target to grow capacity to 290 million tonnes per year some time during 2017. World number four producer Fortescue Metals added 5% to its targeted output hitting a rate 165 million tonnes per year in July.

Unlisted miner Hancock Prospecting’s Roy Hill is on the verge of shipping its first ore from its Pilbara mine which has a 55-million tonnes-a-year capacity. That would place it within shouting distance of Anglo American which is predicting 53 million tonnes for this year before its Minas Rio mine ramps up to capacity of 26 million tonnes in 2016–2017.

Image is artwork by Vik Muniz from the Vale Museum