Between 1984 and 2004, the iron ore price averaged US$13 per tonne, while the three years from 2004 to 2007 averaged US$33 per tonne.
It's only the last seven years where the iron ore price has risen dramatically. Much of that was due to massive growth in China's economy, which now appears to be slowing.
But that huge demand meant iron ore miners around the world rushed to take advantage and add increased production. Simple economics really.
But that cycle may be turning now supply outweighs demand.
Source: Indexmundi
Giant iron ore miner Rio Tinto Limited (ASX: RIO) has today announced that it has deferred the investment decision to go ahead with its new Silvergrass iron ore mine.
But rather than open a new mine, Rio says it is still on track to deliver 330 million tonnes in 2015 and 350 million tonnes by 2017, with extra production coming from existing mines, debottlenecking and improving productivity across its Pilbara mines.
With impressively low production costs, Rio sees no issue with increasing production. As the company notes, "for almost 50 years, the Pilbara assets have produced an average EBITDA margin of 50%."
One newspaper is also reporting that Fortescue Metals Group Limited (ASX: FMG) is considering closing its higher cost Cloudbreak mine, although the miner denies it. WA Today is reporting that Standard Bank's analyst wrote that Fortescue was considering cutting back production to 120 million tonnes from 180 million, partly through the closure of its high cost Cloudbreak mine, and focusing on margins rather than volumes.
Fortescue however denied the rumour, saying, "the report is based on speculation from an analyst with no connection to Fortescue".
The problem is that other large miners, including Fortescue, BHP Billiton Limited (ASX: BHP) and Brazil's Vale are all ramping up production – in an effort to offset falling commodity prices. The problem that brings is more oversupply – estimated at around 200 million tonnes a year – leading to even lower iron ore prices. While many miners had expected higher-cost Chinese mines to close, thereby reducing supply and maintaining a floor under the commodity price – that hasn't occurred as fast nor as far as they had expected.
It's unlikely the iron ore price will fall to levels experienced between 1984 and 2004, but lower prices appear to be on the cards.
