Iron ore price set to plunge

Source: iStock

The iron ore price has been fairly stable over the past few months, trading around US$55 a tonne, but it could be about to sink, and sink fast.

Since July 1, the iron ore price has averaged US$58 a tonne, and traded just below that on Friday at US$57.28 a tonne.


Source; Metal Bulletin

Reasons for the stable price are strong steel production in China, replacement of higher cost, low-grade supplies with higher grade ore – mostly from Australia and Brazil – and an oversupply not materialising.

But those factors could be about to change significantly.

Chinese steel exports fell 2.9% in September, compared to August, and 25% lower than the same period last year. The UK, European Union and US have become very sensitive to the threat of cheap imported Chinese steel on their local industries.

The US increased tariffs on cold-rolled Chinese steel imports in May 2016, according to Vivek Dhar, an analyst at Commonwealth Bank. And the European Union also increased tariffs earlier this month. If steel producers continue to produce at current levels, China may be unable to absorb the additional supply, and producers may have no choice but to cut production.

Dhar also warns about the potential for weaker domestic steel demand in China, as the country tries to slow property price growth. So far though that hasn’t had much effect on the iron ore price.

Meanwhile, supply from the world’s major iron ore producers Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), Brazil’s Vale, Fortescue Metals Group Limited (ASX: FMG) and Gina Rinehart’s Roy Hill mine will add an additional 75 million tonnes in 2017, up from the additional 55 million tonnes they added this year according to Dhar.

Now that could easily replace more high-cost low quality domestic Chinese ore, but if it doesn’t, then the iron ore price will come under pressure.

Should that happen, the miners could see much of their share price gains so far this year evaporate.

How 1 Man Made 100x His Money After 50

Few know, that as Warren Buffett blew out the candles on his 50th birthday cake, he had just 1% of his current fortune. Think about it: At an age when most give up hope, Buffett was just getting started on the remaining 99% of his fortune. Goes to show you that it's never too late for you to potentially get rich. Which is why we've gathered the strategies we learned from Buffett, distilled them down to 11 simple lessons, and put it in an exclusive report for you to claim. Just click here to learn more about this handy investing guide.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.