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Global iron ore market likely be leveled by the BIG 3 miners
7/21/2014 12:00:00 AM

Think of iron ore market and the name of 3 biggies viz., Rio Tinto, BHP Billiton and Vale rings in the ears as the sole determinant of market dynamics catering to nearly 70% of global trade. The behemoths have traditionally played stellar role in balancing of the market forces in over and under supplied situation.Iron ore levels have been turbulent in the last 2 months plummeting to within whisker of 2 years low of USD 89 per tonne after climbing to 2 months high in April at USD 118 per tonne. However the glory of 2010 and 2011 has vanished owing to supply increasing progressively over the years as the miners implemented massive capacity expansion in anticipation of rollicking growth in China gobbling up volumes.Reality is more bitter than sweet with the Chinese economy and steel demand cooling heels with the government hell bent on reining shadow credit and demand propped by the highly speculative housing sector. Reality rates and land values have plummeted obviating the need to indulge in any fanciful buying. If steel production has rocketed so has iron ore inventory touching 115 million tonnes (usual inventory of 70 million tonnes).

Experts have delved in ambiguity to zero upon the mosaic of reasons for divergent movement in iron ore price levels when the mills fetish for production remains insatiate. Think tanks are fertile with theories reasoning out the decline and prophesying market trends. If snapping of credit lines and clamping on using iron ore stocks for buying credit lines has throttled the demand a concerted strategy by the miners to ease out high cost small miners seems plausible on the supply side.

Number of high-cost Chinese iron ore miners have been forced shut their doors for good recently.

According to the China Metallurgical Mining Enterprise Association, around 20% to 30% of Chinese iron ore mines have closed so far, taking a large amount of supply off the market. According to report around 80% of China’s mines have operating costs of around USD 80 to USD 90 per ton. In comparison, BHP Billiton, Vale and Rio Tinto produce ore at around USD 53, USD 68, and USD 44 per ton respectively.

Around 250 million tons of iron ore is expected to be taken out of the market as high-cost Chines mines close. Removing this supply could be enough to level out the market. Both BHP Billiton and Rio Tinto are going to dump around 130 million to 150 million tonnes of additional iron ore supply on the market this year. Analysts believe that the demand for iron ore over the same period is only set to expand by 30 million to 50 million tons. However, with Chinese supply dropping out of the market, the balance could be brought back in line, supporting prices.

It seems to be the right time for these iron ore industry leaders to launch this assault on high-cost

producers thereby bringing in capacity and price rationalization by weeding out high cost Chinese miners. Even though glorious past of price levels above USD 150 per tonne might be history market is expected stabilize at more respectable USD 100-105 per tonne in 2015 after the cleansing.