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Sep 4, 2014

Iron ore prices are down, down — and it’s going to get a lot worse

The Chinese building boom was unprecedented in scope and swiftness. The bad news? The bust will be of the same magnitude.

Today we’ve taken out the post-2009 iron ore price low with a resounding “crack” in the floor of the global steel edifice, and so I’ve prepared a few extra charts to celebrate the occasion and attempt to offer a sense of the magnitude of what is transpiring. First, the price  table for September 2, 2014:

Next, the daily price chart, which again shows no useful contango and no turning signal:


And for history’s sake, the long-term price chart, which has formed the largest and most terrifying bearish descending triangle I can remember in any market:


Next support is at, wait for it, $76.10. Dalian iron ore futures have busted lower again:


Converting this to US dollars is more art than science, but we need to subtract 17% tax plus port and other charges to reach the actual price. It’s signaling roughly US$80 by my calculations, but I wouldn’t take that to the bank.

Rebar futures continue their collapse as well, smashed down to the mid-28050s. Physical steel prices are now chasing hard:


And for more historical perspective, another record low:


So, what to make of it all? There are two large forces coming to bear on steel and iron ore. The first is demand sucks. In absolute terms it’s decent, with steel output still marginally above last year. But in terms of what both the Chinese steel manufacturers expected and built capacity for, and what the global iron miners expected and built capacity for, it is miles short. Both reckoned that demand would rise uninhibited to roughly 1 billion tonnes per annum in 2020. Instead it’s flattening out at around 800 million tonnes today.

Massive steel over-capacity is therefore killing the steel price. I have no idea where it will settle, but we’re not there yet. Before it can find a floor, a number of things must happen. The most important is Chinese steel mills must go out of business, and that has barely even started. The second is that the iron ore price must also find a floor, but we still face epic overcapacity there, too.

And that’s the second great force at work. Iron ore supply has come on at exactly the wrong moment and will keep doing so for two more years at astonishing rates. Some 200 million to 300 million tonnes of capacity will be displaced in the next three years, in Australia, in China, in Brazil, in Africa and everywhere else that digs up the red dirt.

While that transpires, steel mills can shove there own deflation back up the supply chain to preserve their margins, which is exactly what they are doing:


Thus the entire steel and iron ore price deck can and will keep shunting lower until enough capacity is shaken out in both sectors.

The China building boom was historically unprecedented in scope and swiftness. The supply response was equally so. The bust will be of the same magnitude.

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5 thoughts on “Iron ore prices are down, down — and it’s going to get a lot worse

  1. stephen Matthews

    please explain then why the Fortescue Metals share price is up 1% today?

  2. Nick Ryan

    These Iron Ore prices being pushed around are CFR – price delivered China.

    If I were (and I am not) a punter holding FMG, Atlas or BHP, I’d prefer to see reported the FOB price – what suppliers are paid as the stuff is loaded into the buyer’s ship.

    With current freight rates around US$8.50/ton, that means the price in hand is actually $78/79 – an important distinction for higher-price producers..

  3. Graeski

    Since the election of the Liberals and the far-right social contagion they have brought with them I no longer have a stake in the future of this country and neither do my kids, so send the bastards that own the mines broke as soon as possible as far as I’m concerned. It couldn’t happen to a nicer bunch of people.

  4. nonchalance

    Graeski – Gina too?

  5. TomM

    Long term price chart? 5 years is hardly long term for commodities. Look at the price for iron ore for the 10 to 20 years before 2005 and its still currently 2 to 3x where it was, even adjusting for inflation