After closing last week at $54.5/mt for delivery to the Chinese port of Qingdao, the price of 62 percent Fe content iron ore has declined further this week. Last week, most market sources thought that iron ore prices would decline to $50/mt CFR. As expected, on April 1 iron ore prices declined to $49/mt CFR, falling further to $47/mt CFR Qingdao, yesterday, April 2 - the lowest level recorded in the last 10 years. The ongoing decreasing trend of prices has come as a surprise to the global market, creating a mood of caution.
China alone imports 70 percent of global iron ore production. However, in 2014 the country's crude steel production increased by only 0.9 percent to 822.7 million mt. Accordingly, Chinese iron ore consumption also decreased. This situation has continued in 2015, contributing to the declines recorded in iron ore prices. Additionally, at an industry forum, Luo Tiejun of the raw materials department of China's Ministry of Industry and Information Technology (MIIT), recently stated that China will aim to cut as much as 80 million mt of its steel capacity in the next three years to reverse the oversupply issue in the sector. The Chinese government's plans to solve the oversupply issue in the sector will likely impact negatively on iron ore demand in the coming period and support the declines in iron ore prices.
On the other hand, Australian miners BHP Billiton and Rio Tinto are persisting with their investments in cost-efficient iron ore production. The producers announced this week that their production costs are in the range of $20-30/mt and that they are still profitable under the current circumstances, while they still plan to continue their investments to reduce their production costs further. This strategy of the big miners will increase the pressure on miners with medium and high production costs, especially in China, causing them to drop out of the market. In numbers, Australian iron ore production increased by 15 percent in 2014 compared to the previous year to 700 million mt, while Chinese iron ore production declined by 36 percent year on year to 172 million mt. The gap between the production volumes of the two countries is likely to rise in the coming period.
Market sources state that in the short term the prices of 62 percent Fe content iron ore prices may decline to $40/mt CFR China. This may cause fierce competition between Turkish finished steel producers and Chinese steelmakers as the Chinese will have a cost advantage due to their iron ore-based production, while Turkish producers with their EAF-based production are the biggest scrap importer in the global markets.