Iron ore prices have crashed to their lowest level in two years, driven by the ongoing crisis in China’s property sector, which has severely weakened steel demand. This sharp decline is posing a significant threat to the earnings of the world’s largest mining companies.
The price of iron ore has tumbled by more than a third since the start of the year, wiping out approximately $100 billion in market value from the "big four" iron ore miners – BHP, Rio Tinto, Vale, and Fortescue. The current price for iron ore delivered to Qingdao is $92.2 a tonne, the lowest since November 2022, and below the crucial $100 a tonne threshold where high-cost production starts to become unprofitable, according to Argus data.
“Markets are rightly worried that iron ore prices could stay below $100 a tonne in the short term,” said Vivek Dhar, Director of Mining and Energy Research at Commonwealth Bank.
This week, Hu Wangming, chair of Baowu Steel – the world’s biggest steel producer – warned that the steel sector is in crisis, facing a “longer, colder, and tougher” downturn than the market contractions of 2008 and 2015.
Iron ore is a vital revenue source for major mining companies like BHP and Rio Tinto, providing them with the financial stability to deliver strong returns to investors and support growth in other commodities such as copper and fertiliser. However, the fall in iron ore prices has been made worse by a nearly 20% drop in copper prices since their record high in May, driven by weak demand from China.
Despite these challenges, operations in Australia and Brazil remain highly profitable for the big miners, even with iron ore priced at $100 a tonne, due to their low production costs. Both countries have exported record amounts of iron ore in recent months.
Until recently, many mining executives seemed unconcerned about falling demand in China. Last month, Rio Tinto’s CEO Jakob Stausholm said that while steel demand for Chinese property had dropped by 100 million tonnes, the energy transition between 2020 and 2023 had added 40 million tonnes. This is only a small part of the 1.9 billion tonnes of global iron ore production last year.
Analysts suggest that large mining groups will likely manage supply to stop iron ore prices from falling too much. Shipments from Australia and Brazil have already started to slow down, with July data showing a sharp drop.
“Iron ore is such a well-structured industry,” said Bob Brackett, a mining analyst at Bernstein. “The big global miners control their own supply chains. Just as OPEC won’t flood the oil market, these miners will simply slow down production if the market doesn’t want their tonnes.”
However, the ongoing crisis in China’s property market is causing concern among investors about the knock-on effects on steel and iron ore consumption. Housing starts in China were down by a quarter in the first half of the year, following two years of double-digit declines.
Chinese steel mills are currently operating with negative profit margins due to a glut of construction metal, forcing them to cut production to try to boost prices and stay afloat.
BHP and Vale produced record amounts of iron ore in the first half of 2024, and stockpiles of the bulk commodity at Chinese ports have grown by 28% to 150.4 million tonnes compared to the same time last year, according to SteelHome.
Among the large iron ore producers, Fortescue – which gets more than 90% of its revenue from iron ore – has been hit harder than its rivals. Paul McTaggart, an analyst at Citi, said the company’s heavy reliance on iron ore has proven “problematic”.
While the downward pressure on iron ore prices is expected to squeeze profits and dividend payouts at the leading miners, producers in China, Malaysia, South Africa, and smaller companies will be hit hardest, said Cicero Machado, Senior Manager of Bulk Assets at consultancy Wood Mackenzie. These producers “are the ones who will feel the hit first and are likely to be squeezed out of the market if prices keep heading south.”
Xinying Yao, Director of Steel at SMM, a Shanghai-based metals data provider, said that given the time lag between land purchases and construction, it’s hard to predict any improvement in steel demand from the property sector in the next 12 months. “Many steel mills will have to cut production until the industry reaches a tighter balance,” she warned, adding, “We think there’s still room for iron ore prices to fall to $90 a tonne.”
