The iron ore price fell to its lowest level since it moved to a spot market away from annual contracts in 2009 as weakening demand in China continued to weigh on the key steelmaking ingredient.
The price of iron ore for China delivery hit $39.40 a tonne, according to the Steel Index, falling below $40 for the first time since the commodity moved on to a spot market from bilateral pricing agreements in 2009.
In 2007 prices were at $36.63 a tonne, rising to $60.80 the following year, according to data from the International Monetary Fund.
The slump in the iron ore price has weighed on the profitability of the leading mining companies.
Anglo American’s South African iron ore operation Kumba needs to see the commodity at $50 a tonne or above to make profits, according to analysts at Liberum.
Vale and Fortescue need an iron ore price of above $39-$40 a tonne to break even, while the “break even” level for BHP Billiton and Rio Tinto is around the mid to high $20s, said Hunter Hillcoat, analyst at Investec.
The iron ore price has been sliding as the large miners continue to pump out the commodity in the face of faltering demand in China, the largest importer.
Many of the country’s steel mills — which buy it to produce steel — have been facing closure due to weakening demand from the construction industry amid the property sector slowdown.
China’s biggest 101 steel companies lost a combined Rmb72bn ($11bn) in the first 10 months of 2015, or more than double last year’s profits. The sector’s debts have also been piling up, with Sinosteel, China’s largest state-owned steel trader, defaulting on a bond repayment due in October.
According to HSBC, China’s steel industry has seen mill closures which would have produced 50m tonnes of steel. Among them, Tangshan’s Songting Iron & Steel, one of China’s largest private mills, recently suspended operations due to severe losses, placing all its employees on unpaid leave.
Analysts at BMI Research said that China’s steel production had peaked and would contract in the four years to 2019. They forecast China’s steel output to contract by an annual average of 1.4 per cent during 2016-2019, compared with annual average growth of 6.6 per cent during 2011-2014.
They said slowing economic growth and “increasing trade tensions within the global market, due to accusations of Chinese steel dumping, will pressure the Chinese government to scale back domestic steel production and exports over the coming years.”
