On Thursday the Northern China benchmark iron ore price dipped to just below the $50 per dry metric tonne level for the first time since February according to data supplied by The Steel Index.
Iron ore is down 27.4% from its April high near $70, but is still trading 16% higher than at the start of they year.
The correction is the result of near and longer-term supply and demand dynamics (in short: rising output in Australia and slowing demand in China) and many factors are stacked against a seaborne iron ore price above $50:
- The price spike this year and particularly since March was purely a speculative bubble and not an indicator of improving demand
- Chinese port stocks above 100 million tonnes for the first time since February last year is evidence of opportunistic buying and slack in the market
- As much as 50m tonnes steel capacity came back online this year, but China’s swing steelmakers’ margins are shrinking fast and they could exit the market just as quickly
- Beijing is continuing its program of eliminating chronic overcapacity in heavy industry which goes hand-in-hand with stricter pollution controls
- After three decades of growth China’s own steel industry association said steel output already reached its peak in 2014
- US and other countries’ anti-dumping policies mean Chinese blast furnaces can’t export their way out of trouble
- China’s accumulated steel output will top 10 billion tonnes this year, providing a huge reserve of scrap
- With more than 200m tonnes of capacity closed in three years, the remaining domestic Chinese miners may hang on for longer
- Global output is still growing – an estimated 180 million tonnes of additional supply will enter seaborne trade through 2020
- Additional tonnage is on the left of the cost-curve – cash costs at the Big 3 have been cut by half since 2012 and are heading below $10 a tonne
- Roy Hill is ramping up, Vale’s S11D is on target for end-2016, Rio Tinto’s Silvergrass will take less than a year to build and further out the likes of Simandou, Zanaga and Central Eyre (not to mention a resurgent Iran) could fill any gaps opening up
- Record-low freight rates have shrunk the differential between FOB and landed costs, removing another layer of potential per-tonne-profit
- Some marginal miners encouraged by $50-plus prices restarted production and a chunk of this supply is hedged
- Once the number three exporter, India has lifted export duties for low-grade ore and may soon do the same for 58% Fe and up
Even before the recent drop, the consensus forecast of analysts polled by FocusEconomics was a sub-$50 average during the second quarter. Of the 17 analysts polled the most bearish was JP Morgan at an average of just $38, while even the most optimistic, Oxford Analytics saw the price topping out at $55.
The median forecast for 2017 is even more pessimistic at $44.80 over the course of the year according to FocusEconomics data.