Photographer: Andrey Rudakov/Bloomberg

Iron Ore Nearing Rio's `Fantasy Land' Shows Depth of Turmoil

  • Rio CEO Walsh said in February price of $30 was impossible
  • Iron ore, down 45% this year, traded at $39.06 a ton Monday

When Rio Tinto Group’s Sam Walsh, head of the world’s second-biggest iron-ore exporter, was asked 10 months ago whether the steelmaking raw material could reach $30 a metric ton, he derided it as impossible.

“That’s fantasy land -- it simply can’t happen,” Walsh, 65, said in a February interview with Bloomberg Television. “There are very wild forecasts out there that quite frankly just can’t come to pass, otherwise it’s going to be very lonely for us as the lowest-cost producer in the world.”

The comments by Walsh, who headed Rio’s iron-ore business for nine years and is regarded as a veteran in the industry, shows how the pace and depth of the market’s retreat has caught the world’s biggest mining companies off guard. The strategy of Rio and rivals BHP Billiton Ltd. and Brazil’s Vale SA has been criticized by smaller competitors and governments for driving down the price by flooding the market with low cost supply.

Iron ore for delivery to Qingdao port in China fell 2.4 percent to $39.06 a ton on Monday, the lowest since Metal Bulletin began providing daily data in 2009. It’s plunged 45 percent this year, and is 23 percent from $30. The price reached a record $191.70 in February 2011 amid booming demand in China, the world’s biggest consumer and maker of steel.

A spokesman for Rio Tinto declined to comment.

‘Fantasy Land’

Iron ore traded near $63 a ton back in February, when Walsh described a further retreat to $30 a ton “fantasy land.” At the time, Andy Xie, a Shanghai-based independent economist who had predicted a collapse since at least 2012, had predicted a fall to below $40.

The price will trade in a range of $30 to $40 in 2016 as demand from China splutters, Xie, a former Asia-Pacific chief economist at Morgan Stanley, said last week, sticking to earlier comments that the price would dip below $40 a ton by the end of the year.

“Could it get to $30? Sure,” Richard Knights, a mining analyst at Liberum Capital Ltd. in London, said by phone. “When the market is in oversupply, there is no floor to prices until that oversupply is rectified. Right now, we’re not seeing sufficient closures to rebalance the market.”

The most-active iron-ore futures in Singapore fell to $36.04 a ton on Dec. 3. The SGX AsiaClear contract for January was $38.25 on Monday while the contract for March traded at $36.50.

Speaking in Melbourne last week, Walsh maintained the industry mantra of the past decade that Chinese demand for iron ore would continue to support the market.

China’s steel intensity, or rate of consumption relative to gross domestic product, will continue to rise and steel demand globally will grow by 65 percent over the next 15 years, he said. Walsh pledged to maintain an expansion in iron ore in spite of the price slump.

Brazil’s Vale SA, Rio Tinto and BHP Billiton Ltd. are the world’s three biggest iron-ore exporters.

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