Iron Ore Prices Plunge, Miners Suffer

on Sep 12, 2012

Iron ore prices plunged on Thursday, 30 August, hitting a three-year low that was more than 50 percent off the record high set in 2011, reported the Financial Times. Large mining companies such as Rio Tinto (LON:RIO), Vale of Brazil (EPA:VALE3), Anglo American (LON:AAL) and BHP Billiton (LON:BLT) suffered the most, the shares in all falling sharply as a result of the slump.

Iron ore has for years been very profitable for blue chip miners, being the backbone of most of the industrial activities across the world (iron ore is used to produce steel, which is an integral part of any large-scale industrial operation). But the fall on Thursday could mean that the trend is shifting.
For one thing, China’s hitherto insatiable demand for steel is slowing. That could have negative implications for the industry, given that China’s heavy industrialisation has been one of the main factors underpinning the high global demand for iron ore. While it’s probably too early to raise doomsday scenarios, since things could very well change in the future, for now the situation in China, combined with a virtual collapse in the European steel market, has been sufficient to cause the iron ore market to tank.

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!m[](/uploads/story/343/thumbs/pic1_inline.png)Specifically, on Thursday, benchmark iron ore prices fell to $90.75 a tonne for material containing 62 per cent iron delivered in China. According to price reporting agency Platts, there’s been about a 40 percent decrease in price over the past four months and the current levels are miles away from the record set in 2011 when, in February, a tonne of iron ore traded at $200 – an all-time high for the industry.

Many of the world’s largest mining companies have been badly hurt by the slump. Vale of Brazil, the world’s biggest iron ore miner, fell to its lowest share price since mid-2009 and Anglo American also hit a three-year low, closing at £17.54. BHP Billiton, the world’s biggest miner in terms of mining value, was marked down 3.3 percent to £18.42. Other major companies, including Rio Tinto – a 2.09 percent drop to £27.26 – were also in retreat.

So things are definitely not looking good at the moment for the iron ore industry. For upward movement again, steel prices in China need to stabilise, an opinion expressed by Colin Hamilton, commodities analyst at Macquarie in London. Hamilton added that this won’t happen until recovery of steel demand from the PRC’s construction and manufacturing sectors. And the sooner that recovery comes, the better for many companies in the industry, especially smaller-scale operations lacking the reserves to see them through the crisis.

In particular, the market’s collapse and the aggressive destocking by Chinese steel mills could prove to be fatal for companies such as Australia’s Fortescue Metals, which reportedly needs an iron ore price of at least $105 per tonne to service its debt. Not to mention that the funding of the company’s expansion plans relies on strong, stable prices. Ominously, Fortescue stock has dropped 40 percent over the past four months.
The current situation is not great for Chinese miners either. Analysts and Industry executives believe that the fall has brought the benchmark ore price to a point where Chinese producers are starting to lose money. According to some estimations, Chinese iron ore miners need to sell at about $120 per tonne in order to break even.


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