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Is the iron ore price nearing its bottom?

Wednesday, November 9th, 2022

BHP has announced an industry-first initiative to construct 140 flat-pack iron ore cars in the next four years.
The price of iron ore has tumbled since a record high in May 2021.

The iron ore price has been on something of a rollercoaster ride over the past two years.

It reached a record high of close to about $US240 ($371) a tonne in May last year, but the price has since tumbled. And while there were some signs of price recovery last week, the near-term outlook remains bearish.

After the price for 62 per cent seaborne Australian iron ore fines at the port of Qingdao fell below $US80 per tonne (t) on Monday October 31, the commodity, vital in the steelmaking process, recovered to $US87.8/t on Friday November 4.

Much of the downturn is being driven by the stalled housing market in China, Australia’s largest iron ore customer. To put it simply, if fewer houses are being built in China and the country needs less steel as a result, it also needs less iron ore from Australia.

But it seems this downturn in the market is not worrying Australia’s biggest iron ore players, BHP, Rio Tinto and Fortescue.

“We are seeing some short-term weakness, particularly with inflation and interest rates rising in the western world, and those events, combined with some impact from COVID lockdowns on the property sector in China, and so we have seen a pullback in iron ore prices of late,” Rio Tinto Iron Ore chief executive Simon Trott told the ABC.

“But the long-term future for the iron ore business is strong, the world continues to need steel and will continue to need steel for the lives people want to live as well as future decarbonisation.”

All three of the majors have opened new iron ore operations in the last 18 months.

BHP delivered first ore at its South Flank iron ore mine in the Pilbara in May 2021 after $4.65 billion and 9000 jobs made it possible. The 80 million-tonne-per-annum operation is the largest iron ore mine Australia has seen in more than 50 years.

Rio officially opened the doors of its Gudai-Darri mine in the Pilbara, its 17th iron ore operation, in June this year. The mine has a capacity of 43 million tonnes per annum.

And just last month, Fortescue marked a major milestone with the first ore feed into the processing plant at its Iron Bridge magnetite project in the Pilbara, with first production anticipated in the March 2023 quarter.

But if demand is low and supply is up from these new operations, what will that mean for the already-struggling iron ore price?

Lachlan Shaw, co-head of resources research at UBS, told the ABC he feels the price is near its bottom.

“The key level that we’re identifying for now is around $US75 to $US80 per tonne,” he said.

Shaw said he believes the high cost of iron ore operations will see miners lower their production, which will in turn reduce supply and, eventually, lead to a rise in the price.

“We certainly see the demand weakness continuing, and on the supply side what we’re seeing now is all of the world’s major producers talking to increase production, so that’s an increased supply of iron ore heading into next year,” he said.

“The key for the market now will be to come to grips with where cost support kicks in – that is, when do commodity prices start to move inside the cost curve? – and start to pressure iron ore miners to stop mining because they’re losing cash.”

Rio’s Trott understands the current state of the iron ore market may look relatively bleak, but mining is a much longer game than most industries.

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