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Big miners are steeled against falling iron ore

So much for the supercycle. A surge in the price of iron ore earlier this year fueled market chatter about an extended period of commodities demand. The recent reversal in the steelmaking ingredient’s fortunes has been even swifter and may well extend further. Big miners, however, are steeled against the decline.

Iron ore fell almost 20% last week to $103 a tonne and is down by more than half over the past two months. In futures trading in Singapore on Monday the price fell to as low as $90 a tonne. That’s a sharp turnaround: The spot price for delivery to China soared between April 2020 and this July, when it hit around $230. The rise defied tensions between China and Australia that threatened to drag the mineral into a bitter trade spat targeting wine, barley and more. Economic forces, however, are exerting a stronger pull than geopolitics.

Supply from Brazil is slowly rebounding after a dam disaster and the pandemic hit production. At the same time, demand is waning. Beijing, which accounts for about half the world’s steel production, has curbed output to contain runaway commodity prices and to help with decarbonisation efforts. Officials also may want the capital city gleaming when it hosts the Winter Olympics in February. Contagion from struggling property developer China Evergrande portends a broader construction slump. And as vaccines help societies reopen, global consumer spending is shifting toward services and away from steel-dependent cars and appliances. All those trends augur a return to the sub-$100 iron ore price that prevailed between 2014 and 2019.

BHP, Rio Tinto and Fortescue are inevitably suffering from the retreat, but their extraction costs are less than $20 a tonne. In addition, while they’re heavily dependent on iron ore, the trio has either already diversified into other minerals, such as copper and metallurgical coal, where prices are booming, or are expanding and investing into other areas, including potash and green hydrogen. Capital discipline in recent years also means their balance sheets are fortified. As iron ore prices fall, this gives them scope to smooth out some of the wrinkles.
Source: Reuters (Reporting by Jeffrey Goldfarb; Editing by Swaha Pattanaik and Katrina Hamlin)

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