Iron ore collapses below $US50

It’s the first time since April that it’s traded below US$50 while it has now fallen nearly 25% since peaking near US$66 a tonne less than a month ago.

The top suppliers, including Rio in Australia and Brazil’s Vale remain intent on increasing supply as they seek to boost volumes and reduce costs per ton, expanding a glut even as demand in China slows.

Iron ore’s nine-day decline was spurred by figures showing inventories at ports in China rebounded, while exports in June from Australia’s Port Hedland were a record. With some assistance from its contractors, the miner was able to resume operations the following month.

“If the iron ore price falls four bucks today and crashes to $48, it’s not going to affect the cash flow of the business”, Flanagan said. This may result in declining demand growth for iron ore, which in turn may lead to free fall in prices during the second half of the year. Thus, as we have stressed in numerous reports this year, given virtually no iron ore capacity was taken offline when prices breached the $47/mt level in early April, we believe prices must go below this level, and stay there, for any rationalization in capacity to occur.

That could spill over into further weakness for the spot iron ore price which dropped 4.4 percent on Tuesday to $49.70 a tonne.IO62-CNI=SI, according to data compiled by The Steel Index.

What the report does do is present a positive outlook by highlighting the iron ore sector’s contribution to the Australian economy.

“Supply is now outpacing demand, pointing to renewed price pressure”, said Gordon Johnson, an analyst at Wolfe Research LLC in New York.

Many analysts predict a fall to below $US40 a tonne in the next year or two. PJP said any intervention was likely to be “ineffective at best and counter-productive at worst”.

These tend to be circular arguments that don’t really end up with a satisfying conclusion, as can be seen by the fallout earlier this year after widely pilloried comments by Fortescue boss Andrew Forrest that the miners, but not really his company, should limit output in order to boost prices.

So far executives from both BHP and Rio have maintained they have followed the correct strategies, but the poor performance of the share prices suggest investors don’t share this view, or at least not entirely.

The sharp and sudden decline will raise fresh questions about the viability of some iron ore miners.