The Trade Numerologist: Iron Ore Trade Faces New Volatility

The global iron ore business is entering a new era of uncertainty. After a two-decade boom, mining and seaborne trade of the mineral essential to the making of steel seem poised for a time of price volatility and long-term instability.

China, the world's dominant customer, which has driven the market this century, has cut steel exports as trade frictions and tariffs threaten industrial growth in the global economy-- and a recent environmental disaster in Brazil has made a key supply source uncertain, triggering tightness in the market and a rebound in prices.

Global iron ore markets are particularly susceptible to volatility because they're controlled by few players. Two countries - Australia and Brazil - account for a massive 70% of total seaborne iron ore exports - and one country on its own - China -- imports 72% of the total.

In Brazil and Australia, companies like BHP Billiton, Rio Tinto and Anglo American have invested heavily this century in a new generation of supermines, which pump out millions of tons of iron ore a year, much of which gets shipped to China.

Top iron ore exporters, first 11 months, 2018

• Australia $42.7 billion (-3.1%)
• Brazil $18.4 billion (+4%)
• South Africa $3.8 billion (-13%)
• Canada $3.7 billion (+14%)
• Ukraine $2.6 billion (+10%)
• Sweden $2.2 billion (+4%)
• Netherlands $1.7 billion (-6%)
• Russia $1.4 billion (-6%)
• India $1.2 billion (-24%)
• Chile $933.6 million (+0.5%)

Brazil has increased exports by 46% in the last 10 years, ramping up shipments to 389.9 million tons last year.

But last month, on January 25th, at Vale's Corrego do Feijao mine in Minas Gerais, a dam collapsed, sending debris into the adjacent valley, destroying the mining processing plant and crushing residential neighborhoods. Hundreds of workers are dead or remain missing. Vale has been ordered to shut other mines pending an investigation.

The crisis has helped push up iron ore prices this year, as steel mills scramble for raw materials ahead of spring and summer construction and after the Chinese New Year.

The disaster is a massive crisis for Brazil's top miner Vale, which employs around 75,000 people and is expected to have sales of around $37 billion this year. Vale had expected to produce around 400 million tons, and will now lose around 70 million tons of that, disrupting global supplies.

Brazil iron ore exports, 2009-2018

• 2009: 265.9 million tons
• 2010: 310.7 million tons
• 2011: 330.8 million tons
• 2012: 326.5 million tons
• 2013: 329.6 million tons
• 2014: 344.4 million tons
• 2015: 365.1 million tons
• 2016: 374 million tons
• 2017: 383.5 million tons
• 2018: 389.9 million tons

Because of China's new environmental rules, its mines won't boost supply to make up for the new shortfall. And the market's third-biggest supplier South Africa won't be able to do much. Although its mines produce high-grade iron ore, it doesn't have the capacity. Instead, it's Australia that is expected to pick up the shortfall in the market.

Australia iron ore exports, 2009-2018

• 2009: 362.9 million tons
• 2010: 401.9 million tons
• 2011: 437.8 million tons
• 2012: 491.6 million tons
• 2013: 579 million tons
• 2014: 717 million tons
• 2015: 766.8 million tons
• 2016: 808 million tons
• 2017: 827.1 million tons
• 2018: 835.9 million tons

The country's western Pilbara region is the most important iron ore production area in the world, a sprawling desert moonscape where rock is drill-blasted and placed on rail carriers headed for northern ports and ships going to China, still the world's dominant market.

Top iron ore importers, first 11 months, 2018

• China $68.3 billion (-3%)
• Japan $8.6 billion (-2%)
• South Korea $4.9 billion (-2%)
• Germany $3.3 billion (-2%)
• Netherlands $2 billion (-9.1%)
• Taiwan $1.8 billion (-1.6%)
• France $1.2 billion (-3%)
• Malaysia $942 million (+44%)
• India $909.3 million (+116%)
• Turkey $890.7 million (-2.2%)

As China has built itself from an impoverished communist backwater to a superpower able to rival the US in only a few decades, it acquired a voracious appetite for steel, and a stunning capacity to make it.

Global steel consumption has increased to around 1.6 billion tons from 850 million tons in 2000. Half of that is made in China.

Chinese iron ore imports

• 1995: 41.2 million tons
• 2000: 92.4 million tons
• 2005: 275.1 million tons
• 2010: 619.1 million tons
• 2015: 953.4 million tons
• 2018: 1.2 billion tons*
  *projected

Under pressure from trading partners, China has cut its steel exports to 59.2 million tons in 2018 from 100.4 million tons in 2015.

China and its appetite for steel to make cars, buildings, roads and bridges, has made iron ore miners rich, but it's also created a dependency. When the Chinese economy sneezes, the mining business catches a cold.

Iron ore is still one of the world's most profitable mining and shipping businesses, but long-term prosperity will depend on being able to weather the new storms.

Posted 19 February 2019 by John Miller, Guest Blogger