(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Clyde Russell
SINGAPORE, April 28 Now that the euphoria of
iron ore's all too brief rally has evaporated, the question the
market is grappling with is what is a fair price level for the
Spot iron ore prices in China .IO62-CNO=MB ended Thursday
at $66.42 a tonne, down 30 percent from the 17-month peak of
$94.86 reached on Feb. 21.
The problem for industry participants is how to wrestle with
the factors that have driven, or are likely to drive, prices for
the rest of the year.
The traditional method of looking at the supply-demand
balance and assessing the cost of marginal supply does provide a
But if there is one thing that the market has learnt in the
past year, it's that the main driver of the market is policy
decisions in China, and how participants react to them.
The nearly 150 percent rally between the low of $38.52 a
tonne on Dec. 10, 2015, and the peak in February caught most
observers by surprise as it was largely driven by Beijing's
decision to add stimulus to infrastructure spending and
construction, the major demand centres for steel in the world's
largest producer and consumer of the metal.
This year the expectation is that Beijing will wind some of
the stimulus back, thereby trimming demand growth for steel and
If this is the case for the remainder of 2017, this is a
bearish signal for steel and iron ore prices.
A poll of the hundreds of industry participants at the
Singapore Exchange's (SGX) Iron Ore Forum in Singapore on
Thursday showed an increasing pessimism about the price for iron
While about a third of respondents thought the spot price
would average between $60 and $70 a tonne over 2017, about half
thought the price would be below $60 over the course of the
This brings the market back to the question as to what is
the price of the marginal tonne of iron ore supplied to China,
and how far below that does the price have to fall to knock
enough supply out to balance the market.
The majority of estimates seem to be grouped around the $60
a tonne level, this being the point at which 90 percent of
seaborne iron ore suppliers are still profitable.
Certainly the higher prices of recent months led to a flurry
of tonnes being shipped to China from what can broadly be
described as alternative suppliers, which are countries outside
the three major exporters Australia, Brazil and South Africa.
KNOCKING OUT SMALL SUPPLIERS
Chinese customs data shows that a total of 270.9 million
tonnes was imported in the first quarter, a gain of 12.2 percent
over the same period last year.
While the major suppliers did increase their contributions,
their growth rates were below the overall increase, with
Australian supplies up 10.8 percent, those from Brazil by 3.8
percent and from South Africa by 3.3 percent.
India leapt into fourth spot with a massive 332.4 percent
increase, supplying 9.9 million tonnes in the first quarter, or
almost two-thirds of the total it supplied to China for the
whole of 2016.
China's imports from Iran rose 113.4 percent in the first
quarter, while those from Peru gained by 20 percent.
To be sure, China's imports are still dominated by the three
major exporters, but the point is that the higher iron ore price
brought alternative suppliers back to the market, and fairly
Suppliers outside the big three provided China with 13.9
percent of its iron ore imports in the first quarter, up from
12.2 percent for the whole of 2016.
The question for the market is how quickly these extra
tonnes will exit the seaborne market in response to the recent
sharp decline in prices.
An iron ore miner based near India's east coast, speaking on
the sidelines of the SGX iron ore event, said his company had
managed to ship some cargoes to China this year, but when the
price dropped below $70 a tonne it knocked them out of the
Industry consultants CRU presented data at a forum on
Wednesday that estimated that about 50 million tonnes of the
around 100 million tonnes supplied annually to China by
producers outside the big three was fairly elastic, meaning it
will respond to lower prices and exit the market.
But it's also possible the market will have to lose more
higher-cost tonnes, given the expected arrival of more than 100
million tonnes of new low-cost production from Australia and
Brazil by the end of 2018, as the last of the major projects
ramp up output.
The top Australian miners, Rio Tinto, BHP Billiton
and Fortescue Metals Group have reduced the
cash cost of producing a tonne of iron ore to below $15 a tonne,
meaning that once all the other costs, such as freight and
taxes, are added in they can still be profitable at a spot price
of less than $40.
It's a similar story for Brazil's Vale, even
though its freight charges are higher given the longer shipping
distance to China.
Overall, it would appear that iron ore will have to spend
some time below $60 a tonne in order to knock out alternative
seaborne supplies, as well as ensure that high-cost Chinese
domestic miners don't resume operations.
But of course, this assumes that the authorities in Beijing
don't spring any surprises on the market.
(Editing by Christian Schmollinger)