The benchmark price of iron ore on Tuesday picked up slightly after yesterday's 8.3% drop, the second worst day on record.
According to data from the The Steel Index, the import price of 62% iron ore fines at China's Tianjin port added 20c to $104.90 per tonne, soothing fears of free-fall in the price of the raw material on concerns over the Chinese steel industry.
Speaking at a Perth conference, BHP Billiton Iron Ore President Jimmy Wilson, reiterated the company’s view that the market is for continued strong steel demand growth over the next 10 years:
"Our view that Chinese crude steel production is expected to peak at 1.1 billion tonnes, around 2025, is unchanged. We remain confident that global demand for iron ore will continue to grow, though at a more moderate rate, driven by urbanisation and industrialisation,” he said."
Iron ore is trading at the lowest since October 2012, and is down more than 21% since the start of the year, because of a worsening crisis in China's steel sector which consumes more than two-thirds of the seaborne iron ore trade and forges almost as much steel as the rest of the world combined.
The globe's most active steel future – Shanghai rebar – is languishing at all time lows around $530 a tonne as output slows and finished product inventories reach record levels. At the same time iron ore stockpiles continue to grow and imports slump.
The stockpiled iron ore is not being put to industrial use, but because of tight credit conditions inside China the ore is being used as collateral to secure loans. About 40% of the more than 100m tonnes of iron ore at China’s ports are part of finance deals, Mysteel Research estimates. Banks are now calling in these loans, leading to the collapse of steel traders and rumours of the imminent demise of a number of large mills.
Chief executive of iron ore at world number two iron ore producer Rio Tinto, Andrew Harding told the conference this credit squeeze is the main reason behind the recent drop in the price:
the longer term is still intact. I can’t see any change to forecasts."
"So sentiment has turned to a rapid change. I expect volatility on a regular basis," he said, adding that "the longer term is still intact. I can’t see any change to forecasts."
The high inventories may bring about a period of destocking, something which happened in 2012 and led to massive volatility and a $60 a tonne crash in the price over not much more than a month of trading to a low of $87 a tonne.
Analysts at investment bank JP Morgan in a new research note agree with BHP and Rio that the weakness may be temporary, explaining that not since the 2008-2009 financial crisis has iron ore traded below $110 over a quarter:
We see near term risks for prices and they could test Sep’12 lows of $86.7/t.
"We see near term risks for prices and they could test Sep’12 lows of $86.7/t. However, we believe iron ore prices below $110-$120/t should be temporary as weaker prices should make high cost producers uneconomical and together with a potential resumption in restocking at lower levels, it should act as a buoyant force on prices."
China's ferocious demand for iron ore has been a central feature of the global mining industry over the past decade and the driving force behind the spectacular profit growth at mining's big three.
In recent earnings announcement number three producer BHP Billiton (LON:BHP), behind Vale (NYSE:VALE) and Rio Tinto (LON:RIO), said every $1 decline in the price of iron ore translates into a $120 million hit to the bottom line.
Still, with marginal costs of as low as $50 a tonne, the Brazilian and Anglo-Australian giants should be able to weather the storm.
The big three are targetting massive expansion. BHP said its on track to up production at its newest mine Jimblebar to 55 million towards its longer term target of 270 million tonnes per annum. Rio Tinto is most aggressive – it is ahead of schedule to reach 290 million tonnes per annum and further out 360 million tonnes per annum is the forecast.
Vale has been struggling to keep up with the Pilbara producers but the company is nevertheless sticking to its medium term expansion plans to lift its output above 400 million tonnes from the current 300 million tonnes-plus.