Falling iron ore price wipes $100bn off top miner’s market value

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Iron ore prices hit their lowest level in two years as China’s battered housing sector dampens demand for steel, threatening to squeeze earnings at the world’s biggest mining houses.

Prices for the key steel-making ingredient have fallen by more than a third since the start of the year, collectively wiping about $100 billion from the market capitalization of the “big four” iron ore miners – BHP, Rio Tinto, Vale and Fortescue.

Iron ore for delivery to Qingdao fell to $92.2 a tonne, the lowest since November 2022 and below the key $100 threshold at which high-cost production starts to become unprofitable, according to Argus data.

“Markets are justifiably concerned that iron ore prices could be kept below $100 a tonne in the near term,” said Vivek Dhar, director of mining and energy research at the Commonwealth Bank.

Hu Wangming, chairman of Baowu Steel, the world’s biggest steelmaker, warned this week that the sector was in crisis, facing a “winter” that was “longer, colder and more difficult” than recessions previous market returns from 2008 and 2015.

Iron ore is a cash cow for the world’s biggest miners, such as BHP and Rio Tinto, giving them the firepower to deliver huge returns for investors and a solid base for growth in other commodities such as copper and fertilizers.

The decline in iron ore was compounded for major miners by copper which fell nearly a fifth from May’s record high to around $9,100 a tonne as weak Chinese demand dampened investor frenzy for the red metal.

However, the operations of mining majors in Australia and Brazil are still extremely profitable, with iron ore at $100 a tonne, because they are low-cost. Both countries have exported record volumes in recent months.

Until recently, many executives seemed unfazed by the slowdown in Chinese demand. Rio chief executive Jakob Stausholm told the Financial Times last month that steel demand for Chinese properties fell by 100 million tonnes but had a 40 million tonne boost from the energy transition between 2020 and 2023. This is a fraction of last year’s 1.9 billion tonnes of global iron. ore production.

Analysts said major mining groups were likely to be disciplined to prevent iron ore prices from falling too far. Shipments from Australia and Brazil have started to slow, with July data showing a sharp decline.

“Iron ore is such a well-structured industry,” said Bob Brackett, mining analyst at Bernstein. “Big global miners control their own supply chains. In the same way, OPEC is not going to flood the market (for oil), it’s just going to slow down a bit if the market doesn’t want its tonnes.”

However, knock-on effects on steel and iron ore consumption from the sustained slump in China’s housing market are giving many investors cause for concern after housing starts fell by a quarter in the first half of the year, after two years doubling. digit contraction.

China’s steel mills are currently posting negative profit margins due to excess construction metal, putting pressure on them to cut production to raise prices and survive.

BHP and Vale pumped record volumes of iron ore in the first half of 2024, and bulk cargoes are piling up at Chinese ports, with stocks rising 28% to 150.4 million tonnes from this time last year, according to SteelHome.

Among the big iron ore producers, shares in Fortescue, which derives more than 90% of its revenue from the commodity, were hit harder than its peers. Citi analyst Paul McTaggart said the company’s exposure to the commodity had proved “problematic”.

Although downward pressure on iron ore prices is expected to squeeze profits and payouts for top miners, producers in China, Malaysia and South Africa, as well as smaller companies, will feel the pain the most, Cicero Machado said. senior manager of bulk assets at Wood Mackenzie consultancy. They “are the people who will feel the first blows and will likely be taken out of the game if prices continue to trend south.”

Xinying Yao, director of steel at SMM, a Shanghai-based metals data provider, said that given the time between land purchase and construction, it is difficult to see steel demand from the real estate sector improving in the next few years. 12 months.

“Many of the steel mills have to cut production until the industry reaches a tighter balance,” she said, warning: “We think there is still room for iron ore prices to fall to $90 a tonne.”