Why the iron ore price could have further to fall

Things are not looking positive for Australia's key commodity.

The iron ore price may come under further pressure after some disappointing news from one of the world's largest iron ore miners. ASX iron ore shares could face more market pessimism after what has happened.

Numerous iron ore miners exist around the world, with four major players: BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), Fortescue Ltd (ASX: FMG), and Brazilian miner Vale.

In this environment of declining commodity prices, you'd think miners would be cautious with their production volumes to prevent the iron ore price from falling. But one of the major miners has just revealed a concerning update.

Female miner standing next to a haul truck in a large mining operation.

Image source: Getty Images

Vale increases production guidance

The Brazilian miner increased its estimated iron ore production volume for 2024 to a range of 323mt to 330mt, an increase from the previous guidance of 310mt to 320mt. The midpoint of its 2024 annual production guidance has been increased by more than 3%.

Vale also announced that it has started commissioning wet processing operations in the Vargem Grande 1 Project. This project can resume approximately 15mt per annum of iron ore production at the Vargem Grande complex in Minas Gerais.

The miner said Vargem Grande 1 was completed within budget, and commissioning started one month ahead of schedule.

Vale noted this project represents an "important step" towards the iron ore production guidance of between 340mt to 360mt in 2026, resulting in an "improvement of the product portfolio quality, greater production capacity and greater operational flexibility."

Vale is suggesting its iron ore production, at the mid-point of guidance, could increase by another 7% by 2026.

Why is this bad news for ASX iron ore shares?

The iron ore price has already dropped to the low US$90s, and this is significantly hurting the ongoing profitability of the miners.

Mining costs don't typically change much month to month, so a rise in the iron ore price for revenue largely adds to net profit as well. But, the reverse is true when the iron ore price declines – the drop in revenue largely comes off the net profit, too.

Profit pays for the dividend payments and investors usually value a business based on its profit. That's why, since the start of 2024, the BHP share price has dropped 22%, the Rio Tinto share price has fallen 21%, and the Fortescue share price has dropped 44%.

Supply and demand are very important factors in the iron ore price. And Chinese demand is paramount because China is the biggest global buyer of the commodity.

Unless Chinese demand picks up, Vale's increasing supply could put more pressure on the iron ore price. We may not have seen the bottom of this iron ore decline yet.

Motley Fool contributor Tristan Harrison has positions in Fortescue. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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