Iron Ore Market: Oversupply Continues to Hurt Iron Ore Price

The iron ore price slipped below the $50 mark recently, and overall has dropped nearly 27 percent so far this year. If it continues to fall it could see its third straight annual decline. 
All in all, the situation is fairly bleak. However, investors still interested in the iron ore market may want to keep an eye on the factors that influence the metal’s price. While most analysts are not calling for a turnaround in the near future, it’s worth being aware of what catalysts may eventually cause some price movement.

Chinese output and steel demand

China is the largest producer of iron ore, and put out a whopping 1.5 billion tonnes in 2014. The country’s high production is one problem plaguing the iron ore price. While there have been a handful of closures at high-cost Chinese iron ore mines, that hasn’t been enough to alleviate the nation’s high output.
What’s more, China seems determined to avoid further closures and maintain its stranglehold on the market. Case in point: it’s taken measures like cutting back its iron ore resource tax in an attempt to support the industry.

Summing up the situation, Zhu Jimin, deputy head of the China Iron & Steel Association, commented, “[p]roduction cuts are slower than the contraction in demand, therefore oversupply is worsening. Although China has cut interest rates many times recently, steel mills said their funding costs have actually gone up.”
In terms of why demand is falling, one need look no further than the Chinese steel sector. China is the largest consumer of iron ore, with the bulk of its demand coming from the steel market. With the Chinese economy growing at a slower rate than anticipated, less iron ore has been required.

Major miners overproducing

China is not the only entity producing too much iron ore. Industry giants like Rio Tinto (ASX:RIO,NYSE:RIO,LSE:RIO), Vale (NYSE:VALE) and BHP Billiton (ASX:BHP,NYSE:BHP,LSE:BLT) all reported iron ore production gains in the third quarter. And ominously, new technologies such as automated drills and driverless trucks may help lower costs further for these companies.
All in all, Citigroup expects Rio Tinto, BHP, Vale and Fortescue Metals (ASX:FMG) to see their share of the global market increase to 79 percent in 2018 as they continue to pump out more iron ore. Global iron ore production has more than tripled since 2001 partially due to their efforts, and Morgan Stanley (NYSE:MS) has said that the market surplus will peak at 107.4 million tonnes in 2018 and persist through to 2020.

Upshot for the iron ore price

While there aren’t many bright spots in the iron ore market at the moment, some experts anticipate a rebound in a year or two. Vishnu Varathan, senior economist at Mizuho Bank in Singapore, told Reuters that he sees a recovery towards the third quarter of 2016 as most of China’s infrastructure projects get underway.
Meanwhile, UBS (NYSE:UBS) recently upgraded its iron ore price forecast. It expects the iron ore price to reach US$57 by the end of the year, up slightly from its previously predicted $56. However, the firm sees the price dropping to around US$52 for the end of 2016.
Others are not so optimistic. Citigroup sees the iron ore price dropping below the US$40 mark in the first half of next year, and Australia and New Zealand Banking Group sees the price staying in the high US$40 range for the remainder of the year before coming under pressure in 2016.
Again, the situation is fairly bleak for the iron ore price. Investors would do well to watch China and the major iron ore producers for cues on what may be next, and perhaps should take heart that market watchers at least do not anticipate any further big drops for the metal.
 
Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.
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