After weeks of relentless selling
benchmark iron ore prices soared on Monday, enjoying the strongest one-day
gains in more than a year.
Northern China 62% Fe imports tracked by The SteelIndex jumped
$3.20 or 3.9% to trade at $85.20 a tonne, lifting the the steelmaking raw
material off a string of five-year lows set this month.
After hitting a high of $158.90 in February, the industry was jolted
on March 10, when iron ore suffered the worst one-day decline since the
2008-2009 financial crisis, cratering 8.3% in a single session.
The recovery from there was swift, but by mid-June ore was
sliding again and quickly became a one way bet as the market fretted about a
flood of new supply just as demand in top consumer China slowed.
The price of iron ore remains 36.5% weaker than at the start of
the year, but some analysts believe the drop may have been overdone.
Even including freight, insurance costs and royalties, the final
cost for the majors rises to only around $50 – $60 a tonne into China
The Wall Street Journal reports Morgan Stanley believes prices could
drop as low as $70 but the investment banks sees "cost support" at
between $90 to $100 a tonne.
Morgan Stanley believes the price "may rebound towards $90 per tonne by
the end of year as China’s seasonal demand typically weakens, before picking up
again in the fourth quarter.":
"We are of the firm belief that an adequate proportion of
supply from the top end of the cost curve will come out, flatten the curve and
ultimately secure levels of cost support."
Last week investment bank Goldman cut its price forecasts by $10
to an average $80 a tonne next year, but predicted only $1 a tonne declines
over the next two years.
The steep declines in the price is as a result of a surge in low
cost supply, particularly from Australia. Monthly iron ore volumes shipped
through Port Hedland hit a new record in August after rising 38% year on year.
Australian producers, BHP Billiton, Rio Tinto and Fortescue,
plan to add 170 million tonnes of output this year, about 7% of global supply
in 2013 and about 11% of global production outside China.
Supply from Australia could jump again next year when Gina
Rinehart's $10 billion Roy Hill project starts shipping 55 million
tonnes-a-year.
At the same time top iron ore miner Vale is ramping up output in
Brazil from the massive expansion of its Carajás complex, while Anglo American
is nearing production at its 26 million tonne per year Minas-Rio project in the
country.
Goldman's report which came out last week estimates that due to
"the structural nature of the surplus and a weak demand outlook in China
make a recovery in prices unlikely." The bank'sresearch points to the global glut tripling to 163
million tonnes in 2015 from 52 million tonnes this year, and jump again to 245
million tonnes in 2016 and 295 million tonnes in 2017.
A slow response from miners could pressure prices below marginal
cost for a period
The majors can still make money at these prices – ore from the
Pilbara region is estimated to cost just $20-25 per tonne to extract while Vale
is progressing with its target of production costs below $20 a tonne.
Even including freight and insurance costs and royalties, the final cost rises
to only around $50 – $60 a tonne into China and $10 – $15 on top of that via
the longer route from Brazil.
In August, Sam Walsh, CEO of Rio said he expects 125 million
tonnes of high-cost iron ore supply to be taken out of the market this year, as
the lower price forces out low-grade Chinese mines and smaller producers cut
output.
The SteelIndex quotes Ian Roper, an analyst at the investment
bank CLSA, believes as much as 200 million tonnes could exit the market by the
second quarter of next year. A further 115 million tonnes of additional cuts
may be required through 2016-2017 to achieve balance, but "a slow response
from miners could pressure prices below marginal cost for a period."
Last week Australian 3 million tonne per year producer Western
Desert Resources called in administrators.
Western Desert follows others which have fallen by the wayside
including Sweden's Northland Resources, Australia's Cairn Hill and Canada's
Labrador Iron Mines. West African iron ore producers like African Minerals and
London Mining are also struggling to ride out the price slump.
Demand in China for high-quality ore is still strong. The
country imported 8.5% more ore in August than a year earlier, but total imports
for the year – expected to grow by less than 50 million tonnes – would simply
be swamped by the additional tonnage.
Source: Mining.com