uploads///Iron ore companies performance

It’s Hard to Be Positive on Long-Term Iron Ore Price Fundamentals

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Nov. 20 2020, Updated 5:26 p.m. ET

Supply expansions

On July 13, Vale SA (VALE) announced that it would cut the high-cost iron ore production from its Southern and Southeastern systems by 25 million–30 million tons per year. However, it kept the 2015 iron ore guidance production unchanged at 340 million tons. While this is a slight positive in an oversupplied market, the supply pipeline still remains very strong.

Vale is also going ahead with its S11D expansion project as planned, contributing about 90 million tons per year. On the other hand, BHP Billiton (BHP) (BLT) and Rio Tinto (RIO) are sticking to their respective expansions in Western Australia. Gina Rinehart’s $10 billion Roy Hill project is also on schedule to come online later this year. Its full production capacity is estimated to be 55 million tons per year once it ramps up fully.

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While newer, low-cost projects are letting big companies stay afloat in this tight iron ore price environment, smaller, high-debt companies such as Cliffs Natural Resources (CLF) are being choked. The chart above shows the dramatic fall of CLF since the start of 2015. To read more about Cliffs’ recent fall and the reasons responsible for it, read Cliffs Natural Resources: Weak Outlook in a Challenging Market.

The iShares MSCI Global Metals & Mining Producers ETF (PICK) is a good way to get exposure to the iron ore sector without choosing individual companies. BHP Billiton, Rio Tinto, and Vale form about 32.2% of PICK’s holdings. The SPDR S&P Metals & Mining ETF (XME) also invests in metal and mining companies.

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Lower costs to prolong the pain

The mining costs are declining further, with some improvements coming from productivity gains and the rest coming from lower oil prices and depreciating local currencies. This is leading to lower supply costs for iron ore, shifting the cost curve even lower.

Cost benefits like these are also helping some marginal players to weather the current industry downturn. For the high-cost producers to permanently move out of the market, prices will have to remain lower for longer.

Iron ore price outlook

As we discussed previously in this series, China’s fundamentals remain weak, and its growth is faltering. China remains the single most important market for commodities, and any negative outlook there could translate into weakness in the commodities. Higher supply is worsening the scenario.

In light of the above factors, it is difficult to be positive about iron ore’s long-term fundamentals at this time. For the latest updates, visit Market Realist’s Iron Ore page.

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