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Is the Reactivation of Idled Capacity in Iron Ore a Threat?

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Reemergence of nontraditional sources

Iron ore prices remained firm for most of 2016, which may have reactivated iron ore supply from nontraditional sources. Usually, exports to China (MCHI) (FXI), excluding Australia, Brazil, and South Africa, are referred to as nontraditional supply.

Nontraditional sources reemerged as iron ore prices recovered in 2016 and average prices remained above $60 per ton. The supply surge was driven by mines that were temporarily shut down, which were to be reactivated quickly to take advantage of the price rise.

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Chinese domestic production

High-cost and low-grade domestic Chinese iron ore production shuttered capacity in the wake of lower iron ore prices prior to 2016. However, given higher iron ore prices, some of that capacity could come online again.

This worry is shared by Australia and New Zealand Banking Group (or ANZ). The company feels that domestic Chinese iron ore miners could be tempted to increase production due to iron ore’s robust price run.

ANZ’s senior commodity analyst, Daniel Hynes, said he believes that the response from Chinese producers “represents a key risk to prices this year.” He also said that 50 million tons of capacity could be reactivated in China.

Sustainable iron ore price

Iron ore prices above $50–$55 per ton could motivate even major iron ore miners to accelerate their brownfield expansions to fully optimize their infrastructures. BHP Billiton (BHP) and Rio Tinto (RIO) are among these producers. 

Sustainable iron ore prices shouldn’t provide an incentive for miners to increase their capacities any more than what was planned in the iron ore boom era. This is especially true in the face of falling demand growth. Vale (VALE) has already started commercial production for its S11D project.

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