Strong gains in the iron ore price overnight might be an indication the commodity price has bottomed, or has it?
According to Metal Bulletin, spot iron ore rose 2% to US$39.06 a tonne, it's largest gain since October 8, more than 2 months ago.
Iron ore futures also rose overnight, suggesting spot iron ore prices may see another gain tonight.
Iron ore prices are still down a whopping 45% so far this year, putting immense pressure on junior, high-cost producers, with BC Iron Limited (ASX: BCI) shuttering its Nullagine JV mine with Fortescue Metals Group Limited (ASX: FMG), as we wrote here.
Several ASX-listed iron ore miners appear to be operating at a loss at current prices, and others could be forced to shut up shop if prices remain at current levels.
However, I see iron ore prices falling further as additional supply comes onto the market – as the chart below shows.
Gina Rinehart's Roy Hill mine started shipping ore to its major customers last week and is ramping up to produce 55 million tonnes of ore – expected within 18 months.
BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) have already increased production and could continue to do so.
Brazil's Vale intends to increase production by 30%. Vale's S11D project is expected to produce 90 million tonnes of high-quality ore and is around 77% complete. Vale current produces 340 million tonnes a year, but is forecasting between 380 and 400 million tonnes in 2017 and between 420 and 450 million tonnes by 2020 – at an amazing C1 cash cost of US$10.80 a tonne.
All-in landed cost in China in 2018 will be US$23.80 a tonne according to Vale.
Fortescue expects to have its C1 cash costs down to US$16 a tonne by the end of this year, equal to analyst's estimates for BHP, with Rio at around US$15.20 a tonne. And we shouldn't forget that Fortescue has ordered a fleet (8) of its own very large ore carriers (VLOCs), with expected delivery from November 2016. Those will likely further reduce the miner's costs of getting ore to China.
Foolish takeaway
When the four largest iron ore miners in the world can produce a tonne of high-grade iron ore for under US$20 a tonne and ship it to China for not much more, I expect prices to fall even further. Recent gains in the spot iron ore price appear to be a temporary reprieve.
