How Long Will Shrinking Iron Ore Exports Continue?

by: Emerging Money

By Mitchell Hall

Iron ore exports from Brazil and Australia fell 28% and 8%, respectively, in November. Spot prices are at a six week low and pressured to shrink for the rest of the year, thanks to flaccid Chinese demand.

China is the world’s largest iron ore producer (and consumer, being the world’s largest steel producer), with Australia and Brazil in second and third place, respectively, for iron ore production.

Brazilian iron ore exports of 32.6 million tons were $2.64 billion in November, down from from 32.7 million tons in October and 31.8 million tons in the same month last year.

Iron ore exports from Port Hedland in Western Australia to China declined 8% to 16.2 million tons, although increased shipments to Japan and Korea meant total shipments from Port Hedland stayed level with October at 21.7 million tons.

Because construction slows in China during winter, demand for steel products drops, and prices have recently fallen to levels last seen in September. Weakening physical steel prices are having a knock-on effect on iron ore, while construction has flat-lined in northern China.

This is obviously bearish in the short term for the top miners such as Brazil’s Vale (NYSE:VALE) and Australia’s Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).

On Monday, Vale cut its capital expenditure budget by 24% to $16.3 billion thanks to the struggling global economy, saying ”The outlook for slower expansion of global demand for minerals and metals in the medium term requires rigid discipline in the allocation of capital and greater focus in maximizing efficiency and reducing costs.”

However, iron ore inventories are generally low, and continued to fall at major Chinese ports last week, standing at below 90 million tons, so iron ore prices are unlikely to fall sharply in the near future.

In fact, Reuters market analyst Clyde Russel argues that copper and iron ore demand and prices both stand to rise, given the recent improvement in both of China’s purchasing managers’ surveys, but the steel-making ingredient may have scope for bigger gains.

The iron ore market is increasingly volatile, and is tending to overshoot both the tops and bottoms of each cycle. Vale says it expects a huge derivatives market in iron ore to eventually take shape as players seek hedging instruments to minimize risk from increasingly volatile prices.

Given that China’s stimulus-led infrastructure construction is starting to come online and will pick up in the spring, iron ore exports should start to pick up again by the end of the first quarter next year.