We related last week a forecast from Nomura that iron ore was going to keep falling, and probably more steeply, as it tends to follow Shanghai rebar futures (the most-traded steel futures) and those have plummeted of late. It looks like spot iron ore prices are indeed catching up (or down) with rebar, and that’s taken iron ore below the critical $120/tonne mark.
Why is $120 important? Because of the cost curve. This comes up a lot in the world of iron ore, so it might be worth revisiting what that means.
The “cost curve” just refers to the price level at which each producer can and will continue to produce. Above their price level they’ll profit and below it, they’ll tend to cut or stop producing. Of course this is a very broad generalisation and lots of things can get in the way but that’s believed to be the general structure of the market today.
Detailed cost curves can be hard to find as the iron ore miners themselves don’t like to talk about where they sit on the “curve”. But here’s one from late last year:
You can see in the light blue on the right-hand side all those marginal Chinese producers for whom it becomes unprofitable to keep operating when prices fall below $120 – $130/tonne. The consensus view is that their exit means the supply balance will overshoot and the resulting shortfall will push prices back up to at least $120, so that they can come back online. Clearly there are a lot of assumptions in there … but that’s enough for now.
And — oh yes — here’s what iron ore has done so far this year. Click to enlarge but the spot price is about $116/tonne today:
However prices were well below this level in 2009; in fact about half the price they are now.
As Macrobusiness points out, the 12-month iron ore swap showed signs of resurgence on Friday and China’s bulk freight and coal shipping prices seem to be moving from their lows, as expectations of central bank stimulus rise. So the sub-$120 price for spot iron ore may turn out to be short-lived.
China’s large and medium steelmakers’ profits fell 95.81% yoy for Jan-June – Also Sprach Analyst
The reverb from Shanghai rebar – FT Alphaville
How China can keep urbanising – with flat steel demand – FT Alphaville