What goes up must come down goes the old adage and although the cycle can sometimes take years to play out it usually holds true in the end. Some predict the beginning of the end of the iron ore bubble, a topic we touched on last week when we discussed the move to quarterly pricing by the big three iron ore majors. An interesting article in Reuters this week reviews the new mines desperately rushed on stream to cash in on the record spot prices being paid by Asia’s steel mills. Current demand for 1.3 billion tons of iron ore produced annually suggests a deficit according to the article but that deficit could vanish if iron ore output matches growth forecasts of 50% more ore by 2015. At the same time, steel output is widely forecast to grow by only a third, to about 1.7 billion tons. Australia, the world’s largest exporter of iron ore, expects to ramp up its annual shipments by 40% to 552 million tons over the next five years. Much of the growth will come from new mines being opened up in Australia’s mid west region of western Australia, south from the traditional iron ore rich reserves of Pilbara belonging to BHP and Rio. More than two dozen mines are proposed or under development in Australia, some of which could contribute hundreds of millions of tons to worldwide supply. Brazil is also investing heavily in new mines such as Vale’s Caraja Serra Sul mine expected to produce 90 million tons per year when it comes on stream in 2012, making it the second largest iron ore mine in the world after Vale’s Carajas Mine.
In West Africa projects are either underway or on the drawing board in Cameroon, Mauritania, the Democratic Republic of Congo, the Tonkolili iron ore deposit and the Marampa mine in Sierra Leone and Simandou in Guinea, to name but a few. Some of these deposits are of lower grade than Pilbara or Carajas but by jointly developing them with Chinese steel mills or mining companies western explorers have a guaranteed off take and funding that makes them viable. Elsewhere projects in Russia, Greenland, Mongolia and even in China itself will, to varying degrees, increase the volume and number of supply options available over the next few years. Once established, projects in which Asian steel mills have direct involvement (such as in West Africa) will give them access to stable priced ore and not be as reliant on the big three or the spot market.
Does all this add up to a glut in iron ore as the article suggests? It’s hard to envisage in today’s market but with a little imagination it is not so hard to imagine a time 2-3 years in the future when there are many more iron ore sources of supply and the stimulus measures in China have been withdrawn such that steel production is stable rather than rising every year, creating a surplus in iron ore supplies. Under those circumstances the more responsive pricing mechanism the iron ore producers have forced on steel producers will go into reverse and prices could fall as they did in 2009 when consumption fell relative to supply. How soon before prices are back well below $100 per ton? It could be sooner than we think.