The iron ore saga seems like it has been going forever. In reality, though, the collapse is relatively recent. It wasn't that long ago that the price was in triple figures.
The question for a long time was whether it would fall below US$120 per tonne. Then $100. Then whether it'd stay below $80 for long. Then $70, $60…
A tonne of iron ore is now selling for a little over or under (depending on the day) US$50.
Up, up, and…
It's been a pretty extraordinary ride. For the longest time, a tonne of iron ore could be purchased for around the price of a movie ticket. But in 2004, something started to happen:
"As recently as July 2004, you could buy a metric tonne of iron ore for $US14. By February 2011 that same tonne of iron ore cost you $US187.18…"
The culprit (or Santa Claus, depending on whether you were a buyer or seller) was an historical mismatch between the sheer size and rate of growth of Chinese demand compared to the amount of iron ore available.
As we all know from high school, at its heart, business and economics is all about supply and demand. When more people are buying than selling, prices tend to go up.
And go up, they did — that seven year stretch delivered a 13-fold increase in the price of the red dirt. It was like manna from heaven for the miners — and Australia's budget — as China couldn't get enough, and was prepared to pay the going rate to get it.
Talk of a 'new normal' was only surpassed by the claim that we'd entered a 'super cycle'. Super it might have been, but it remained a cycle.
… back down
The second part of that high school economics lesson — ignored by miners and many investors — was that whenever there's a deficit of supply and high profits are made as a result, it attracts new competition. In our case, that meant a tidal wave of new supply as the miners all competed to dig ever bigger holes ever more quickly.
And the seemingly insatiable Chinese thirst for the world's iron ore began to wane, just compounding the problem.
The result is, well, pretty clear. From that US$187 high, we have prices that are fluctuating around US$50/tonne, as that excess supply fights to find a market.
It's terrible news for mining investors, for mine workers and for the services and supply businesses that ramped up to meet the new demand. Whether or not the same volume of iron ore continues to be sold remains an open question, but new exploration is well and truly off the table for a few years at least, and those who'd built their businesses on supporting that expansion are now desperately trying to save the furniture.
It's true that cautionary tales are often lost to history. By the time the next potential problem rears its head, the past has been forgotten. Booms and busts seem ever present, and we seem ever blind to them until it's too late.
