Daily Management Review

Iron Ore Supply Glut Pulls Down Prices


Dampened growth outlook for China is weighing heavy on iron ore demand.

World Iron Ore market is witnessing an expansion in supplies led by increasing capacity of largest producer across the world. The beginning of 2015 was even tougher for the iron ore market than the finish of 2014. The iron ore prices tumbled below $50 per metric ton thereby recording a substantial shrink of nearly 35% in 2015. According to some analysts, the sharp drop in iron ore prices is the result of substantial rise in production in the recent years and overestimation of China’s import of iron ore. This high expectations has stimulated the industry giants, Vale of Brazil, BHP Billiton and Rio Tinto to step up their production activities. All this added to the supply glut of iron ore which in turn will drag down the prices further.

Iron ore is an essential source of mineral for production of steel which is the foundation of global industries. Over past 12 months, the iron ore producers were constantly involved in persistent price cuts in order to maintain their pace in the highly competitive environment, while some companies were operating at a loss. The iron ore prices have steeply declined to almost half, over the past 12 months. During the year 2014, world’s major consumer of iron ore, China imported more than 930 million tons of iron ore.

During the year 2014, the iron ore prices plunged 47% due to increasing supply from Australia and Brazil and easing of demand from China. Iron ore is among the most badly hit commodity due to deceleration in China’s GDP growth.

Australia, the largest iron-ore exporter worldwide has lowered its price outlook in response to the increasing shipments that added to the supply glut. According to the Department of Industry and Science, the iron ore prices are expected to remain nearby $60 per ton in 2015 as compared to the forecast of $88 in 2014.

The world’s leading producers of iron ore like Rio Tinto and BHP Billiton and Vale has made huge investments in order to increase low-cost production despite a drastic fall in iron ore prices, seeking to escalate their sales thereby compelling their small rivals to shut down their businesses.

Global iron ore market witnessed a boom due to soaring demand for iron ore from China that sparked the iron ore prices in 2011. With a slowdown in the world’s second major economy China, the iron ore prices slipped to almost one-fourth of its record $200 per ton in 2011. And now the Chinese mills are willing to buy shipments at spot prices as the prices are dropping at a faster pace.
 The growth forecast for China’s steel demand is likely to remain torpid in 2015 which is turn is expected to dampen the iron ore consumption. While the iron ore production will continue adding to the supply. However, it is expected that some small iron ore suppliers will depart yet the market will be oversupplied in the near term.

Tags : Iron ore