Iron Ore Boom Weakens as Chinese Demand Eases

iron ore

LONDON – Following a half-decade-long boom in demand from China, the price of iron ore dropped sharply in 2012. While it bounced back a bit toward the end of the year, the price remains far below its February 2011 peak, and analysts say it is unlikely to return to those heights in the foreseeable future.


The price of iron ore, the raw material used to make steel, is a bellwether for manufacturing and construction and its price fluctuations, much like the price of crude, reflect the health of the global economy.


China’s rapid growth and heavy focus on industry and infrastructure investment have made it the biggest single driver of iron ore prices. According to The Wall Street Journal, China accounts for about 60 percent of global iron ore demand. By comparison, the U.S. accounts for 3 percent of global demand.


Much of that iron ore has come from Australia, where the economy has grown increasingly dependent on sating China’s appetite for natural resources. But as the once red-hot Chinese economy has slowed, that demand has sagged.


To make matters worse, plenty of iron ore is still being produced, even as demand drops, putting further downward pressure on prices. Because of the extensive planning required to develop mines, decisions that determine the supply of iron ore are made years in advance. Production has jumped over the past decade, and a great deal of ore continues to be shipped, even as the spot price has dropped from a high hovering above $190 a ton in February 2011 to bottom out around $99 a ton this September. It has since rebounded to levels nearing $130.


Brighter economic data from China has driven the recent uptick and steel mills have shifted toward a modest restocking of ore supplies. But experts believe those jumps are temporary.


“Our long-run view for iron ore remains structurally bearish, with seaborne supply growth likely to continue outstripping instrumental demand,” Credit Suisse commodities experts wrote in a mid-October report entitled, “Bulking Up: Iron Ore – Is the Rebound History?”


“Cyclical dynamics will continue to move prices,” the Credit Suisse team said.


Jaakko Kooroshy, a research fellow on energy, environment and resources at the London think tank Chatham House says that, as low prices begin to deter fresh investment in ore mines, tightening supply could help drive prices up. Rising demand in China’s less-developed western provinces could also help boost ore prices.


But none of those increases is likely to push prices to the heights they reached during the commodity boom.


“A lot of people I’m speaking to have the impression that the real heavy lifting in terms of iron ore demand has happened already in China,” said Kooroshy, co-author of a recent Chatham House report, “Resources Futures,” which highlighted the enormous need for metals created by China’s infrastructure-driven growth path.


“As the economy becomes more sophisticated, it is no longer steel that is the big story, but other types of metals like copper or nickel, where you want to build higher quality stuff,” he said.


Adding more downward pressure is a new entrant on the supply side. Scrap steel, much of it recovered from poor quality Chinese buildings now being demolished, is coming onto the market in larger quantities, Kooroshy noted.


Credit Suisse adds that, for now, an abundant supply of iron ore is likely to keep a lid on prices even as China’s recovery gains strength, as it is expected to do in 2013 and beyond.


Credit Suisse says prices are unlikely to sink again to the sub-$15 rates of the early 2000s. That is partly because production costs have risen. And Credit Suisse noted that the Big Three suppliers – BHP Billiton, Rio Tinto and Vale – are likely to gain market share, a structure that means steelmakers will not have much power to negotiate lower prices.


“As we approach the 2020s, we are likely to see further moderation of China’s steel demand growth, as well as a steady rise in the rate of recycling of scrap steel, pinching out the demand for virgin iron units,” Credit Suisse explained. “In other words, the best years for iron ore pricing are behind us.”