Rough ride for global miners as iron ore prices continues descent

The big miners like BHP Billiton, Anglo American and Rio Tinto all fell around 3% yesterday as the price of iron ore continues its precipitous fall in 2014, hitting $87 a tonne, a drop of over 35% this year. The average price of iron ore in 2013 was $135 a tonne.

Those will low production cost mines such as BHP Billiton in Western Australia have been increasing production to offset low prices but declining demand from the Chinese steel industry means there a danger of a glut in supply. Around two thirds of global demand is driven by Chinese consumption with a third of that used by a slowing property construction sector. Recent restocking by Chinese steel producers has come to a halt, driving iron ore prices down 5% this week alone. Some are now predicting that prices could fall as low as $70 a tonne, very bad news for higher cost producers.

Many are worried that the willingness from Chinese steel mills to take one more iron ore is weakening, and marginal buyers are lacking in the market with inventories at high levels. The big falls this week were triggered by official data from China’s National Bureau of Statistics showing the price for new homes fell last month in almost all cities that the government tracks. It was the third straight month of average new home price declines in China.

Every $10 per tonne fall in the price knocks more than $2 billion off the revenues of Vale, Rio Tinto and BHP Billiton, and around $250m from Anglo American. In the longer term the cheaper producers are hoping that weak prices will drive out competitors from the market and curtail supply in future years but in the meantime the profitability of the sector is declining fast and if China’s economic activity weakens things could be bleak this year and next as global production of ore increases from 1.1 billion tonnes to around 1.5 billion tonnes.

Contrarian Investor UK

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