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Commodities
Iron ore proves 2014’s commodity turkey
From the Financial Times of Tue, 23 Dec 2014 20:15:31 GMT

And the prize for the worst performing major commodity in 2014 goes to . . .

If you thought the answer was oil you would be wrong. Crude’s vertiginous fall since June may have grabbed the headlines but as the year draws to a close, iron ore is on track to take this unwanted accolade.

The price of the steelmaking ingredient, a key profit generator for big mining houses such as BHP Billiton, Rio Tinto and Vale, has dropped more than 50 per cent over the course of the year, outpacing Brent, the international oil marker, down 45 per cent.

The reason for the meltdown is primarily supply, which has emerged more broadly as the key narrative in commodities over the past 12 months.

In short, the large producers brought a significant amount of new capacity on line this year just as demand growth in China, the world’s biggest steel producer and consumer of seaborne iron ore, started to slow.

Ominously, they plan to add more tonnes to the market in 2015 even though the price of benchmark Australian ore is languishing at $65.60, the lowest level since the second quarter of 2009. Analysts believe BHP and Rio alone will crank up capacity by an extra 70m tonnes.

With the majors seemingly hell bent on delivering these extra tonnes — as the lowest-cost producers running vast operations, they assume they can withstand weak prices while rivals fall out of the market — the question is what, if anything, can absorb or offset this fresh supply.

Shortview

Those looking to increased demand from China’s steelmaking industry are likely to be disappointed. Morgan Stanley thinks 2015 will mark the peak in Chinese steel consumption and production with growth turning negative as the country turns away from heavy fixed asset investment.

Others are gloomier still. The slowdown in China’s residential property sector, where the construction boom has saddled many areas with oversupply and falling prices, could lead to a 10 per cent reduction in steel production in 2015, according to J Capital Research.

So the case for a stabilisation in prices rests on more supply leaving the 1.3bn tonne a year seaborne market. Rio Tinto estimates 125m tonnes of capacity will close this year. The cuts have come from non-mainstream producers in countries such as Iran, Indonesia and Mexico, as well as high-cost privately-owned mines in China itself.

But the remaining high-cost supply could be more difficult to dislodge. Weak oil prices and depreciating commodity currencies have thrown small and midsized producers a lifeline, while large parts of the Chinese mining and steel industry are controlled by state-owned steel companies where jobs, not profits, are the priority.

As such, a sustained period of low prices — perhaps falling to $50 a tonne — will be needed to force closures and eventually balance the market.

neil.hume@ft.com



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