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Iron ore global glut — Latest bad news suggests four years of very low prices

Iron ore mining in India by Peter Craven, on Flickr

Are we paying attention? This assessment below, if true, will shut off a lot of hoped for iron ore mine and rail products from Africa to Mongolia. Mine executives hoping for a return to market demand prices of $90 and higher are betting upwind based on the evidence this past two years.

Mining Weekly picked up the following iron ore demand/supply information from different sources. Reuters is one source. Bloomberg another. The predictions for a higher iron ore price market keep getting worse. Up to half of iron-ore output by miners outside the three mega producers in Australia and Brazil may be at risk of closure or at least significant production and export cutbacks. This will occur with global demand set to peak at about 1.4 billion tons next year, according to Goldman Sachs analysts. Production volumes among top miners – Vale, Rio Tinto and BHP Billiton – may not be at risk, the bank said. But their profit margins are dropping further.

Goldman Sachs, in contrast, predicted that the rest of the iron ore industry (and the railways and maritime forces that service the export industry) is “now facing an existential challenge..”

Goldman analysts Christian Lelong and Amber Cai said in a report that “We expect seaborne iron ore demand to peak in 2016 as the displacement of marginal Chinese iron ore production fails to offset a contraction in China’s domestic steel consumption.”

Goldman cut its 2015 iron-ore price estimate by 18% to $52 a tonne. It forecast $44 in 2016 and $40 in 2017 and 2018. That is down 29% to 33% from previous estimates. Other sources like Moody’s estimate that the delivered Iron ore price could drop to $40 this year and next. No one is seriously talking out loud anymore about a price surge up towards $90 or more.

Current China delivered price for Iron ore hit $46.70 on April 2. That is based on the current spot-based price system — compiled by Goldman Sachs. Strategic planners with projects depending upon iron ore new export projects coming on line before 2018 — or maybe even staying in business. — really need a Plan B. Their current plans are based on the iron ore world changes seen about four to ten years ago.

What is your prediction?