Poor demand for steel across the world, and especially in China, has led to a 36 per cent fall in the benchmark price of iron ore since early July. The key steel-making ingredient is now at its lowest level since 2009 at $87 a tonne, a move that has hammered the share prices of key commodity players.
Prices have broken through what many analysts believed to be the 'price floor' for iron ore of about $120 a tonne. This is the point where Chinese iron ore producers - those with the highest cost base worldwide - will start losing money and supposedly stop mining. If iron ore prices stay below $120 a tonne for some time supply from Chinese miners will decline and the resulting shortfall will push prices back up again - so the theory goes.
Except this hasn't happened, at least not yet. In fact, many Chinese steel mills have been running at a loss for months and recent reports suggest the industry could soon make large-scale shut downs. Cheaper iron ore will no doubt help, but if the demand isn't there, supply-side fundamentals will only get them so far. Iron ore stockpiles in Chinese ports are close to record highs, too, so help from restocking is unlikely to come immediately.
Accordingly, the world's largest iron ore miners have started to make cuts. Australian miner Fortescue Metals, the world’s fourth-biggest iron ore producer, will defer A$1.6bn (£1bn) in spending over the next year as it struggles under a heavy debt load. Fortescue's shares have fallen more than 25 per cent since July and, according to analysts from UBS and Deutsche Bank, the company will barely break even next year if the current price environment continues.
BHP Billiton, the world's biggest mining group by market value, last month shelved more than A$30bn-worth of projects in Australia - including an iron ore port expansion and the $20bn Olympic Dam copper-uranium development - in light of falling commodity prices and rising costs.
