Iron ore prices have plummeted to their lowest point in two years, driven by the ongoing crisis in China’s real estate sector, which has severely weakened demand for steel. This sharp drop poses a risk to the profits of the world’s largest mining companies.
The value of iron ore has fallen by more than a third since the start of the year, wiping out around $100 billion in market costs for the “big four” iron ore miners: BHP, Rio Tinto, Vale and Fortescue. Iron ore delivered to Qingdao costs $92. 2 per ton, the lowest since November 2022, and below the important threshold of $100 per ton, where high-cost production begins to become unprofitable, according to data from Argus.
“Markets are rightly aware that iron ore costs could remain below $100 a tonne in the near term,” said Vivek Dhar, director of mining and energy studies at Commonwealth Bank.
This week, Hu Wangming, chairman of Baowu Steel, the world’s largest metals maker, warned that the metal sector is in crisis and facing a recession “longer and harder” than the market contractions of 2008 and 2015.
Iron ore is a major source of revenue for primary mining corporations such as BHP and Rio Tinto, offering them the monetary stability needed to deliver strong returns to investors and the expansion of other commodities such as copper and fertilizers. Iron ore prices have been compounded by a roughly 20% drop in copper prices from their all-time high in May, due to weak Chinese demand.
Despite those challenges, operations in Australia and Brazil were very successful for the mining giants, including with iron ore valued at $100 per tonne, due to their low production costs. Both countries have exported record amounts of iron ore in recent months.
Until recently, many mining executives did not seem concerned about declining demand in China. Last month, Rio Tinto CEO Jakob Stausholm said that while metal demand for Chinese households had fallen to one hundred million tonnes, the energy transition between 2020 and 2023 had added 40 million tonnes. This is just a small component of last year’s 1. 9 billion tonnes of global iron ore production.
Analysts suggest that large mining groups will likely control supply to prevent iron ore prices from falling too far. Shipments from Australia and Brazil have already slowed, with data for July showing a sharp drop.
“Iron ore is a very well-structured industry,” said Bob Brackett, a mining analyst at Bernstein. “Large global mining corporations have their own supply chains. Just as OPEC would not possibly flood the oil market, those mining corporations would simply reduce their production if the market doesn’t need their tons.
However, the crisis in the Chinese real estate market is worrying investors due to its effect on the consumption of metal and iron ore. China’s housing starts fell by a quarter in the first part of the year, after two years of double-digit growth. Declines.
Chinese metals generators are lately operating on negative profit margins due to a glut of structural metals, forcing them to cut production to increase costs and stay afloat.
BHP and Vale produced record amounts of iron ore in the first part of 2024, with bulk iron ore inventories at Chinese ports rising 28% to 150. 4 million tonnes compared to the same time last year, according to SteelHome.
Among the major iron ore producers, Fortescue, which makes more than 90% of its profits from iron ore, has been hit harder than its competitors. Citi analyst Paul McTaggart said the company’s heavy reliance on iron ore has proven “problematic. ” “
While downward pressure on iron ore costs is expected to affect earnings and dividend payments for primary mining companies, manufacturers in China, Malaysia, South Africa and small businesses will be hit the hardest, said Cicero Machado, senior director of bulk assets at consultancy Wood. Manufacturers “are the first to be affected and the ones who threaten to be excluded from the market if costs continue to fall”.
Xinying Yao, director of metal at SMM, a Shanghai-based metals knowledge provider, said that given the lag between land acquisition and construction, it is difficult to expect an increase in demand for metal from the real estate sector in the coming years. “Many metal producers will have to reduce production until the industry reaches a tighter equilibrium,” he warned, adding: “There is still the option for iron ore prices to fall to $90 per tonne. “
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