Slide in iron ore prices a hiccup for miners amid copper scramble
Summary
The price of iron ore has dropped to its lowest in nearly two years, a drain on profits for some of the world’s biggest miners.
The price of iron ore has dropped to its lowest in nearly two years, a drain on profits for some of the world’s biggest miners as they raise bets on commodities like copper that they expect will be essential to the energy transition.
Iron ore, used to make steel, is one of the worst-performing mined commodities this year, hit hard by the crisis in China’s property market as far fewer homes start construction.
The benchmark price for iron ore is down by as much as 36% in 2024 so far. A daily price of $90.25 a metric ton on Tuesday is the lowest one recorded since November 2022, according to S&P Global Commodity Insights, which assesses iron-ore prices. The price edged a tad higher Wednesday.
Several of the world’s biggest miners rely on the commodity for a big chunk of their profits. For BHP Group, the world’s most valuable miner, iron ore contributed 64% of earnings in the year through June. Rio Tinto, the second-biggest miner by value, relies on iron ore for nearly seven of every 10 dollars it earns.
Those companies have much lower mining costs than smaller rivals, meaning their mammoth iron-ore operations continue to be lucrative even at reduced prices. They may not be as big a moneymaker in the future as they have been in the recent past, though.
The downturn is a hit to corporate war chests at a time when miners, after years of holding back on big investments, are increasing spending on projects and acquisitions in copper and some other commodities, including lithium. Those commodities are expected to experience a sharp rise in demand as more money pours into renewable energy, electric vehicles and power grids.
The mining industry needs to consistently finance and build new copper projects at a rate that was only achieved for a few years at the end of the China-led commodities boom if the world is to meet a goal of limiting the rise in temperatures to close to 1.5 degrees Celsius, commodities consulting firm Wood Mackenzie has previously said.
Of the commodities that miners dig up, iron ore is one of the most vulnerable to a slowdown in China, which buys seven in every 10 tons of iron ore shipped globally. Its property sector is a top source of steel demand.
Chinese housing data suggest that the sector remains in bad shape, despite the government stepping up support for it and other industries in recent months. As a result, many steel mills there are losing money on their sales.
“China’s steel industry has raised alarm about how tough conditions can become," said ING analyst Ewa Manthey. In August, steel giant China Baowu Steel Group cautioned that the situation facing the steel sector is more dire than prior downturns this century, and that the slump is likely to be longer and more difficult than previously expected.
A 5% fall in China’s iron-ore imports in August from a year earlier is the first annual contraction since November 2022 and reflects the subdued state of steel demand in China, said Commonwealth Bank of Australia analyst Vivek Dhar.
Iron ore has been piling up at the country’s ports, with stockpiles stored at major Chinese port facilities up by roughly 30% year to date.
Analysts are divided over what could happen to prices next.
Some reckon iron-ore prices are likely to remain under pressure, citing the losses at Chinese steel mills and buildup in port stockpiles. ING’s Manthey expects the price to average $95 in the final quarter of the year.
Others argue mining costs should stop prices from falling much further and that the commodity could enjoy a bounce as iron-ore supply growth slows and steel mills restock raw materials following the summer, as they typically do. Commonwealth Bank’s Dhar forecasts iron ore will trade between $100 and $110 a ton in the fourth quarter.
Economists at BHP last month said the market is experiencing a deepening glut and they expect supplies will continue to outpace demand into 2025.
Still, they estimated mining costs could put a floor under prices somewhere in the range of $80 to $100 a ton. The thinking is that dips below that level would cause high-cost producers to stop mining, helping to rebalance supply and demand.
BHP Chief Executive Mike Henry pointed to the company’s margins as reassurance the miner can ride out volatility in prices. The miner recorded a margin of 68% for its iron-ore business last fiscal year.
Still, investors worry the big miners’ iron-ore businesses are so huge that there’s little they can do to counter a sharp fall in prices.
“Right now, there’s real pain in [the] iron-ore world," Panmure Liberum analyst Tom Price said in a note. On the near-term outlook, Price is in the bear camp.
“Already down 30-40% YTD, is there any upside for ore prices? Not yet," he said.
Shares in BHP and Rio Tinto are down by roughly 20% year to date. Brazil’s Vale, another top producer, is down roughly 35%.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
