Iron ore has persisted its ostensibly relentless declines with the share price of the steel manufacturing commodity sliding to a fresh-year low regarding concerns over the rising supply and slowing demand.
The raw material, which is basically very essential to the profitability of several large mining groups including BHP, Vale, Rio Tinto, Billiton, which all dropped by nearly 40 % this year which was the worst performing sector across metals and bulk commodities as several wave of new seaborne supply having hit the market.
However, over the past month, concerns regarding how deep the supply have been exacerbated by indications and apprehensions of the slowing demand in China which purchases were approximately two-thirds of the global supply of iron ore.
Figures that were earlier released this week showed that China was able to import 74.9 tons of iron ore last month which was down 9 % from the month prior and an estimated equivalent to its June levels as still mills cut operating rates to their lowest levels since the latter month of the first quarter.
Last week’s decline led to the price of the benchmark ore for the immediate delivery into China diminished $1 to $82.20 a ton, after a long period of above trend in profitability is enjoyed by the iron ore industry was nearing its finality as it was defeated by the billions of dollars primary producers have ploughed into newer low-cost capacity.
The inflection point, according to analysts is the portion where new production capacity can finally catch up with demand profit and growth margins beginning its reversion into the historical mean. In other words, the end of the Iron Age is fast approaching.
The bank is predicting a price of $80 per ton next year and has lowered its estimates for the next succeeding years 2016 and 2017 to $79 and $78, correspondingly.
At these prices, large producers such as Rio and BHP will still be able to come up with the required amount of goods returned from iron ores. Still, their respective ability to return capital to shareholders is a key demand for mining investors which will be impaired if not adequately addressed.
The price decline has been considerably dramatic but a weak demand outlook in China along with the structural nature of the surplus could make the recuperation very unlikely adding the excess supply could only be absorbed by an surged of inventories or the displacement of subsidiary production.
Rio, the second leading producer of iron ore, expects approximately 125 million tons of high-cost supply to exit the market this year as cheaper grade producers from China and other less traditional supply countries cut back their production.
This is very much expected to result to an offset of new supply to seaborne markets from Australian and Brazilian producers.
In a report last week, analysts stumbled upon west African iron ore producers such as London Mining and African Minerals faced an existential threat regarding the next 6-12 months that would have been earlier curbed by meaningful capital injection/debt reorganisations.
With more supplies set to move forward by next year and by 2016 from several companies, it will further reduce iron ore supply which is presently needed to set-off the market.
Traders are still reckoning many of the remaining high-cost supply specifically in China which could prove very oppressive and difficult to remove from the current market.
Prices tend to undermine oversupplied markets primarily because marginal producers have a rather strong incentive in delaying mine closures when they are principally operating at a losing streak.
Furthermore, far from being an irrational decision, there is a cause to argue that this type of trend is simply indicative of the cost associated with inactive assets and associated loss of option value.