Who Benefits from Iron Ore Oversupply?

Reuters published an article that looks at the question of who is actually benefiting from iron ore oversupply, noting that interestingly the main beneficiaries are companies that make steel-intensive products.

That said, the publication also points out that borrowers may be “the ultimate beneficiaries.”

Addressing the question of who wins, the article states:

Not investors in BHP Billiton and Rio Tinto, with the Australia-listed shares of both now a third below 2011 levels.

Not the Chinese steel mills, although their woes are largely self-inflicted as well, having built 1.2 billion tonnes of capacity, about 40 percent of which is now idled.

How about iron ore traders? They will have benefited from the rapid growth in market volumes and the increasing use of paper derivatives, such as Singapore Exchange’s swaps.

But the extended period of low prices has most probably eaten away at their margins as well, making iron ore at best a marginal business.

Australian state and federal governments are also likely to be less than pleased, given their royalties are priced-based, meaning lower prices outweigh higher volumes.

Australian workers benefited in the construction phase, but with no more work in the pipeline, many will struggle for jobs.

Steel end users are also not certain beneficiaries, with Chinese property developers struggling, again largely because of the decision to over-invest.

The main beneficiaries of the iron ore glut have to be makers of steel-intensive products, such as cars and white goods, but competition in their industries may not allow them to build margins on the back of lower input costs.

Perhaps the ultimate beneficiaries are borrowers, as lower steel prices feed through into several products, keeping inflation low to non-existent in many countries, and letting central banks keep interest rates at historic lows.

Click here to read the full Reuters report.