One of the worst things you could have done with your money so far this year is invest it in iron ore. Prices for the steel ingredient collapsed in spring and have been far from recovering ever since. Most analysts mention two key reasons for the trend, i.e. record production from miners and slowing growth in China.
The world’s second biggest economy buys around two-thirds of all the iron ore sold globally. The China slowdown comes amidst the largest increase in iron ore production the world has ever seen. The industry produced around 1.1 billion tonnes in 2013 for seaborne export, which is even expected to hit 1.4 billion tonnes by the end of 2015.
Last week the benchmark iron ore price fell to a two-year low of $87 per tonne, which compares to around $140 per tonne in January. Some even say the price could slump to fresh five-year lows. Global mining giants might be facing a slump in revenue because of the 36 percent collapse in iron ore price, but that’s nothing to what Chinese producers might have ahead of them. Aton’s Dinnur Galikhanov, a Senior Analyst focusing on metals and mining, says the present global situation with iron ore in not exactly over-production, as many call it.
“I wouldn’t call it over-production but let’s say a deliberate increase in production by major global producers such as BHP, Vale, Rio Tinto, those guys realize that their production is still relatively cheap compared to say Chinese, and they can produce and still make profit even if prices go down, so they probably decided that it is worth taking a risk of price declines but at the same time by pushing the prices down to try and push some of the less efficient Chinese producers out of the market,” Aton’s Dinnur Galikhanov said.
Dinnur says, by the yearend we’re most likely to see a reduction in output of iron ore from China, which means that major global producers made the right bet on the pretty aggressive strategy to gain additional market share. And only then iron ore prices might start to bounce back.
