Back In A Happy Spot

Iron ore miners are raking in the cash, but in such a cyclical business the high prices won’t last forever.

- Gaurav Sodhi

The iron ore boom was meant to be over. Between 2005 and 2011, benchmark prices rose from less than $US30 ($43)a tonne to an astonishing $US185, a price never achieved before – or since.

At those prices, North Korean smugglers were risking their lives to get red dirt across the border and Western miners were tearing apart any ore-bearing land they could find. In 2010, we warned that the bubble would burst and burst it did – spectacularly.

By the middle of 2015, prices had fallen to less than $US40 a tonne. Companies that didn’t go bust survived by cutting spending and volumes to refocus on profits. Discipline returned. Costs came down, the industry recovered, and all the while Chinese consumption continued to rise.

In 2015, at the bust’s nadir, China imported about 900 million tonnes of iron ore. It now imports about 1 billion tonnes. Then came a new shock.

Safety woes

Revelations of safety breaches from Brazil placed a rocket under iron ore prices. They have risen more than 50% in the past three months and now trade at over $US100 a tonne as Vale, the world’s largest producer, has been forced to close 85 million tonnes of output indefinitely.

That output looks unlikely to return anytime soon. With serious breaches being uncovered in at least 10 mines and dozens more being affected, the Brazilian government is more likely to force larger, prolonged shutdowns than to encourage a hasty return to normal production.

The price of iron ore is reflecting a genuine supply shock rather than optimistic exuberance about Chinese consumption. This time – maybe – it is different.