The contract price for iron ore delivered to China fell 8.3% on Monday to an 18-month low of $104.70 per metric ton (tonne). That is the second-largest one-day fall on record.
The collapse has hit mining stocks hard. Rio Tinto PLC (NYSE: RIO) lost nearly 2% Monday and is losing another 2% in Tuesday’s premarket trading. BHP Billiton PLC (NYSE: BHP) lost 2.7% Monday and is down more than 3% this morning. Vale S.A. (NYSE: VALE) dropped 1.76% Monday but is inactive so far, and London-traded Anglo American dropped 1.33% on Monday.
As with copper, the drop in iron ore prices is a function of demand from China. Demand for steel has fallen since the beginning of the year as economic growth slows in the Middle Kingdom. Lending for new construction is drying up as well, and new government pollution guidelines have forced many small steelmakers out of business. A Chinese steel industry analyst told the Financial Times that “at least a dozen of the nation’s largest steel mills are lossmaking.”
Industry executives continue to believe that Chinese steel production will peak in 2025 at 1.1 billion tonnes and that demand for iron ore will continue to grow. The current drop in prices is simply short-term volatility, but in the long haul demand for iron ore will be strong.
The miners have made serious efforts at reducing costs and lowering capital spending in a play to keep investors from bailing out. The companies also are selling projects and assets, both to boost cash to pay investors and to shed the project development costs. Share buybacks and improved dividends are threatened, though, if iron ore prices continue to drop.
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