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Will the Iron Ore Carnage Continue in 2016?

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Jan. 20 2016, Updated 11:57 p.m. ET

Iron ore carnage

As CEO of Rio Tinto (RIO), the world’s lowest-cost iron ore giant, Sam Walsh distributed an email to the company’s employees: “Late last year, we saw market prices continue to rapidly fall. What we see ahead is very sobering. This situation is not temporary and our industry is moving into the new normal, which means we must continue to be one step ahead.”

With these sobering words, Walsh gave a clear indication that the situation in the iron ore market is perilous indeed.

The benchmark seaborne iron ore prices touched a low of $37 on December 11, 2015. This is below the break-even for many small iron ore producers.

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Iron ore companies lost significant value

To be sure, 2015 was nothing short of a nightmare for commodities (DBC), including for iron ore. Iron ore stocks such as Rio Tinto (RIO), BHP Billiton (BHP) (BBL), Vale SA (VALE), and Cliffs Natural Resources (CLF) fell to multiyear lows last year.

The graph above shows the iron ore companies’ 2015 price movements. Cliffs Natural Resources (CLF) had the steepest fall of all at 78%. Vale SA (VALE) fell by 59%, and BHP Billiton (BHP) (BBL) and Rio Tinto (RIO) lost 35% and 23% of their value, respectively. CLF forms 3.6% of the SPDR S&P Metals and Mining ETF (XME).

The demand growth in steel was more muted from China than expected by many in 2015. The capacity curtailments were not enough to match the new capacity coming online. The Roy Hill project in Australia finally started delivering volumes in December 2015 after a delay of several months. Vale’s project expects to yield 90 million tons per year and is going on as planned, ready to hit the market in 2016 and 2017.

What lies ahead?

With 2015 behind us, investors are wondering whether 2016 could be any better for iron ore companies or whether things could get even worse.

In this series, we’ll look at the seaborne iron ore industry’s 2016 outlook and explore how its supply and demand could play out in 2016. This could give a clue regarding the future direction of iron ore prices.

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