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Iron ore prices have hit their lowest level in two years as China’s stricken property sector depresses steel demand, threatening to squeeze earnings at the world’s largest mining houses.
Prices for the key steelmaking ingredient have plunged by more than a third since the start of the year, cumulatively wiping off about $100bn in market capitalisation of the “big four” iron ore miners — BHP, Rio Tinto, Vale and Fortescue.
Iron ore for delivery to Qingdao has slipped to $92.2 per tonne, the lowest since November 2022 and below the key $100 mark at which high-cost production starts to become unprofitable, according to Argus data.
“Markets are justifiably worried that iron ore prices may be sustained below $100 per tonne in the near term,” said Vivek Dhar, director of mining and energy research at Commonwealth Bank.
Hu Wangming, chair of Baowu Steel, the world’s largest steel producer, warned this week that the sector was in crisis, facing a “winter” that was “longer, colder and more difficult” than the previous market downturns of 2008 and 2015.
Iron ore is a cash cow for the world’s biggest miners such as BHP and Rio Tinto, giving them the firepower to make bumper returns for investors and a solid foundation for growth in other commodities such as copper and fertiliser.
The fall in iron ore has been compounded for the big miners by copper dropping almost a fifth from its record high in May to about $9,100 per tonne, as weak Chinese demand quelled an investor frenzy for the red metal.
However, the mining majors’ operations in Australia and Brazil are still hugely lucrative with iron ore at $100 per tonne because they are low cost. Both countries have exported record volumes in recent months.
Until recently, many executives seemed unfazed by the demand declines in China. Rio chief executive Jakob Stausholm last month told the Financial Times that steel demand for Chinese property had dropped 100mn tonnes but had a 40mn tonne boost from the energy transition between 2020 and 2023. That is a fraction of the 1.9bn tonnes of last year’s global iron ore production.
Analysts said the large mining groups would probably be disciplined to prevent iron ore prices from collapsing too far. Shipments from Australia and Brazil have started to slow, with July data pointing to a sharp decline.
“Iron ore is such a well structured industry,” said Bob Brackett, mining analyst at Bernstein. “The big global miners control their own supply chains. In the same way Opec won’t flood the market [for oil]they will simply slow down a bit if the market doesn’t want their tonnes.”
Nevertheless, the knock-on effects for steel and iron ore consumption from the sustained rout in China’s property market is giving many investors cause for concern, after housing starts were down by a quarter in the first half of the year following two years of double-digit contraction.
Steel mills in China are currently making negative profit margins because of a glut of the construction metal, piling pressure on them to cut production to boost prices and survive.
BHP and Vale pumped out iron ore at record volumes in the first half of 2024 and the bulk commodity is building up at Chinese ports with stockpiles rising 28 per cent to 150.4mn tonnes versus this time last year, according to SteelHome.
Among the large iron ore producers, shares in Fortescue, which derives more than 90 per cent of revenues from the commodity, has been hit harder than its peers. Paul McTaggart, an analyst at Citi, said that the company’s exposure to the commodity has proved “problematic”.
Although the downward pressure on iron ore prices is expected to squeeze profits and payouts at the leading miners, producers in China, Malaysia and South Africa, as well as smaller companies, are going to feel the pain the most, said Cicero Machado, senior manager of bulk assets at consultancy Wood Mackenzie. They “are the folks that will feel the hit first and likely to be squeezed out of the game if prices continue to trend south”.
Xinying Yao, director of steel at SMM, a Shanghai-based metals data provider, said given the time between purchasing land to construction, it was difficult to see demand for steel from the property sector improving in the next 12 months.
“Many of the steel mills have to cut down production until the industry gets a tighter balance,” she said, warning: “We think there’s still space for the iron ore price to come down to $90 per tonne.”