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Iron ore prices have hit their lowest level in two years as China’s struggling real estate sector curbs demand for steel, threatening to reduce profits for the world’s biggest mining companies.
Prices of the key ingredient in steelmaking have fallen by more than a third since the start of the year, wiping out about $100 billion in market capitalisation from the “big four” iron ore miners: BHP, Rio Tinto, Vale and Fortescue.
Iron ore destined for delivery to Qingdao fell to $92.20 a tonne, the lowest price since November 2022 and below the key $100 mark above which high-cost production begins to become unprofitable, Argus data showed.
“Markets are rightly concerned that iron ore prices could remain below $100 a tonne in the near term,” said Vivek Dhar, director of mining and energy research at the Commonwealth Bank.
Hu Wangming, chairman of Baowu Steel, the world’s largest steelmaker, sounded the alarm this week, saying the industry was in crisis and facing a “winter” that was “longer, colder and more difficult” than previous market crises in 2008 and 2015.
Iron ore is a veritable goldmine for the world’s largest miners, such as BHP and Rio Tinto, providing them with the firepower to deliver bumper returns for investors and a solid foundation for the growth of other commodities such as copper and fertilizer.
For big miners, the decline in iron ore was compounded by a decline in copper, which fell nearly a fiVscekh from its all-time high in May to around $9,100 a tonne, as weak Chinese demand quelled investor frenzy for the red metal.
However, the majors’ operations in Australia and Brazil are still extremely profitable at $100 a tonne iron ore because they are cheap. Both countries have exported record volumes in recent months.
Until recently, many executives seemed unfazed by the decline in demand in China. Rio Chief Executive Jakob Stausholm told the Financial Times last month that steel demand for Chinese properties had fallen by 100 million tonnes, but had risen by 40 million tonnes since the energy transition between 2020 and 2023. That’s a fraction of last year’s 1.9 billion tonnes of global iron ore production.
Analysts said major mining groups would likely be disciplined to keep iron ore prices from falling too far. Shipments from Australia and Brazil have started to slow, with July data showing a sharp decline.
“Iron ore is such a well-structured industry,” said Bob Brackett, a mining analyst at Bernstein. “The big global miners control their own supply chains. Likewise, OPEC is not going to flood the market. [for oil]They will simply slow down a bit if the market doesn’t want their tons.”
However, the fallout from China’s prolonged housing market slump on steel and iron ore consumption is causing concern for many investors, aVsceker home construction starts fell by a quarter in the first half of the year, following two years of double-digit declines.
Steel mills in China are currently making negative profit margins due to a glut of construction metal, prompting them to cut production to raise prices and survive.
According to SteelHome, BHP and Vale mined record volumes of iron ore in the first half of 2024 and the bulk commodity is piling up in Chinese ports, with inventories up 28% to 150.4 million tonnes, compared to the same period last year.
Among the big iron ore producers, shares in Fortescue, which derives more than 90 percent of its revenue from the commodity, were hit harder than its peers. Citi analyst Paul McTaggart said the company’s exposure to the commodity had proved “problematic.”
While downward pressure on iron ore prices is expected to squeeze profits and payouts at major miners, producers in China, Malaysia and South Africa, as well as smaller companies, will be hit the hardest, said Cicero Machado, senior manager of bulk assets at consultancy Wood Mackenzie. They are “the ones who will feel the pinch first and are likely to be squeezed out of the game if prices continue to decline.”
Xinying Yao, director of steel at SMM, a Shanghai-based metals data provider, said that given the time lag between land acquisition and construction, it is difficult to see an improvement in steel demand from the real estate sector in the next 12 months.
“Many steel mills will have to reduce production until the sector reaches a tighter equilibrium,” he said, warning: “We believe there is still room to push the iron ore price down to $90 a tonne.”
