Or so goes the quote from a recent Reuters article which explores the rapid changes in the global seaborne iron ore market.
To be fair, it has always been a big boys’ game that requires deep pockets to finance the massive upfront capital expenditure often in environmentally hostile or remote parts of the world. With limited futures options, miners have largely had to dig and hope the customers will be there. Miners have to agree to off-take agreements but pricing remains a risky affair.
Still, demand rocketed after the financial crisis on the back of Chinese stimulus measures that are driving strong steel production in the world’s largest consumer. Iron ore miners the world over could do no wrong it seemed and investment followed the demand, resulting in many smaller miners springing up in Australia and further afield. Indeed, so limited were supply options that steel producers joined the fray, either buying up smaller miners or investing in Greenfield sites to ensure long-term access to supply.
As prices for any commodity fall, producers usually react by cutting back on output after a period of time, but what we have seen in iron ore is a raft of new suppliers combined with massive expansion at the world’s big three – BHP, Rio and Vale all coming into the market at the same time, just as demand growth slows in the world’s principal market.
As this graph from HSBC shows supply from newcomers was a particular feature over recent years but growing supply from established players will be the driving force in 2014-16, dominating the seaborne market.
According to Reuters, by 2015 the major producers in Brazil and Australia will account for 1.15 billion tons or 83% of the world seaborne ore trade, quoting Australian government data, up from 71% just three years earlier. BHP expects to produce 245 million tons this year, up 9% on last year and well ahead of expectations. Rio Tinto is boosting output 9% to 290 million tons this year, with talk of a possible rise to 360 million tons in the cards. Whilst Vale is aiming for 312 million tons and produced a record amount in the second quarter through June 30.