Sunday, 1 March 2015

Iron ore: Another classic example of cartel behaviour


The price of [iron ore] is trading at the lowest levels since early May 2009. So far in 2015 the price has fallen 12.5% following a year in which the commodity nearly halved in value [to $63/tonne]

... more than softening demand, increased supply has been blamed on the fall in the price. Global production of iron ore rose by an annual average of over 6% from 2010 to 2014 despite the fall in prices and is set to expand even further this year.

The growth in output came mainly from the big three producers – Vale, Rio Tinto and BHP Billiton – which even at today's price enjoy fat margins thanks to cost of production of only around $25 a tonne.

Goldman Sachs released its estimates for iron ore on Friday. The investment bank cut its outlook for iron ore for this year to $66 a tonne this year, down substantially from an earlier estimate of $80: "Significant overinvestment to date will ensure that the market is well supplied, while demand from the Chinese steel sector is maturing. A painful war of attrition awaits."

So the Big Three are doing pretty much exactly the same as the Saudis with oil. Drive up prices and lull lots of would be competitors into investing in higher cost production, then boost output, watch prices halve and drive them all out of business again.


Tim Worstall said...

Not entirely. The mines that will be closing are mostly the higher cost and *older* mines. The ones that will survive are the newer and larger scale mines. So it's more technological development than cartel behaviour (and the cartel, which there used to be in Pacific iron ore, hsa largely been broken in favour of spot contracts).

Mark Wadsworth said...

TW, I was talking to a real world steel trader importer exporter and he told me about this and said it deliberate cartel squeeze behaviour.

I mean, hooray for improvements in technology and lower prices, but it's all a bit of a sudden and to the great advantage of the Big Three.