Iron ore sinks and is headed lower

The spot iron ore price fell just 0.2% overnight to US$50.15 a tonne, but further falls appear to be on the way.

Overnight, Chinese iron ore futures fell 1.4% – usually a good indication of the direction of the spot iron ore price. But that could change given China releases its manufacturing and steel industry purchasing managers’ indices (PMI) data for May later this morning.

So far the spot iron ore price has plunged 29% since peaking at US$70.46 a tonne on April 21. That appears to have been built mostly on the back of a flood of speculators into the commodities futures markets rather than any actual underlying supply and demand.

Champion Iron CEO Michael O’Keeffe has told Reuters that he doesn’t see the market recovering quickly – and is in fact banking on it. Champion Iron is looking to restart production at the Bloom Lake iron ore mine in Canada, but needs time to develop mine and processing plans to reduce operating costs and boost annual production to 7.5 million tonnes.

But Fortescue Metals Group Limited (ASX: FMG) CEO Nev Power has also told Reuters, “Now is not the time to start new mines. Now is the time to work what is already up harder.

Along with Fortescue, BHP Billiton Limited (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Brazil’s Vale have all slashed their already low production costs even lower, forcing other high-cost producers out of the market. It has also helped that Australian and Brazilian iron ore is much higher quality than domestic Chinese iron ore.

BHP’s shares fell 2.1% in London overnight, and Rio’s share price slipped 1.1%.

Foolish takeaway

Given the world’s steel oversupply and the precarious position of many of China’s steel mills, iron ore prices could well fall further from here.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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