What Sent Iron Ore Prices into a Free Fall?



Iron ore prices on a free fall

Iron ore prices finished 2016 with an 80% increase, contrary to market participants’ expectation of a downside. The trend continued in 2017 with iron ore prices pushing $95 per ton in February, which was a 30-month high.

However, iron ore prices have been trending lower since then, ending 1Q17 closer to $80 per ton. The slide then became more pronounced. On April 13, 2017, prices closed at $68 per ton, the lowest price seen in the last six months. In just five trading sessions, prices fell ~17%. Inventories at Chinese ports have been increasing as doubts persist over the slowing Chinese government stimulus, leading to weaker demand. The weak demand and robust supplies are taking a toll on iron ore prices.

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Iron ore miners

Iron ore miners had an unexpectedly good year in 2016. In early 2017, miners also gained momentum, which has now slowed with weaker iron ore prices.

Vale (VALE) is leading miners (XME), with a gain of 24.7% in 1Q17. Rio Tinto (RIO) and BHP Billiton (BHP) saw modest gains of 5.8% and 1.5%, respectively.

Cliffs Natural Resources (CLF), which outperformed its peers with an annual rise of 404% in 2016, lost 2.4% in 1Q17. Its APIO (Asia-Pacific Iron Ore) division is directly exposed to seaborne iron ore prices. Cliffs Natural Resources’ pricing for long-term contracts in its US (SPY) (SPX) division is also tied to benchmark iron ore prices.

Series overview

Investors should note that even with the current iron ore prices, big mining companies are earning attractive margins and most mid-tier miners can stay afloat. The concern is not that correction has taken place in the last few weeks but that prices could weaken further.

In this series, we’ll look at the seaborne iron ore industry’s 2017 outlook and explore how its supply and demand could play out in 2017. This analysis will offer some insight into the future direction of iron ore prices.


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