Iron Ore Wars

By | Updated March 8, 2016 5:02 PM UTC

Iron is one of the world’s most common elements, making up about 5 percent of the Earth’s crust. But one place that doesn’t have nearly enough is China. So when the country’s furious urbanization took off more than a decade ago, China began to import huge quantities of iron ore to produce the steel it needed to build factories, highways and skyscrapers. Thus began an epic race to meet China’s needs, fueled by soaring prices, with metal from the furthest corners of the globe. Now that China’s economic growth is slowing, the boom is looking like a bust. Iron ore prices have collapsed, and the big producers — miners in Brazil and Australia — are squeezing out higher-cost rivals from Sweden to South Africa to Iran. In Australia, the slump has sparked a debate about whether the nation is now squandering its iron ore riches.

The Situation

The price of iron ore had tumbled to less than a quarter of its 2011 peak by the end of last year, as the biggest producers pressed ahead with expansions planned when the market was soaring. While prices rebounded somewhat in early 2016 as China’s policy makers signaled they would support economic growth, several analysts predicted the bounce would be short-lived. Smaller rivals have blamed Brazil’s Vale and the two Australian giants, Rio Tinto and BHP Billiton, for exacerbating a global supply glut. With the price dipping below $40 a metric ton at the end of 2015, only a handful of producers — the largest and lowest-cost operations — are expected to survive. Some projects conceived during the go-go years are being halted or delayed. Guinea, one of the world’s poorest countries, hoped a $20 billion investment in mines, railroads and ports would transform its fortunes; now there’s doubt they will ever be built. Meanwhile China continues to consume more than two-thirds of the world’s iron ore exports and produce about half the world’s steel. Yet demand for steel inside China has peaked, many analysts say, leaving the market oversupplied. So China’s steel producers expanded exports by a fifth in 2015. That’s spurred complaints that the country’s state-owned and state-supported steel mills are illegally dumping their output on world markets below cost, a charge they deny.

Source: International Monetary Fund

The Background

Iron replaced bronze as the metal of choice for tools and weapons in Europe and the Middle East in about 1200 B.C., giving the Iron Age its name. Major deposits were uncovered in the U.S. and Australia in the mid-19th century, bringing an era of commercial mining to fuel industrial growth. Australia’s main market was Japan, though exports were curbed in 1938 amid concern shipments were bound for munitions factories during the Second Sino-Japanese War. During those tense prewar years, Australians worried that the country’s reserves were limited. Discoveries from the 1950s revealed that Australia holds about a quarter of the world’s iron ore, followed by Brazil with 17 percent. Until 2010, prices were set largely through annual contracts in private negotiations between suppliers and their biggest customers, for decades chiefly in Japan. The system broke down as the price for immediate delivery surged higher and higher above the annual level, and now shorter-term contracts use reference prices that are set daily. The $225 billion annual market for iron ore is bigger than any other commodities except oil and gas.

Source: World Steel Association

The Argument

Iron ore prices are simply returning to their historical range, some observers argue, and the drop benefits users of steel including carmakers and construction companies. And why shouldn’t the most efficient miners be the ones to survive the battle for market share? One reason, articulated by smaller miners and labor unions, is that expanding supply and depressing prices cheats the public in producer nations. In Australia, lower tax and royalty payments mean iron ore exports now account for about 3 percent of gross domestic product, down from 5 percent in 2013. Colin Barnett, the premier of ore-rich Western Australia, says the miners are pursuing a “flawed strategy” of increasing output in an oversupplied market and should better tailor production to match demand. Australian billionaire Andrew Forrest, the founder of Fortescue Metals, has called on the largest miners to cap their shipments, envisioning a cartel-style agreement similar to the one OPEC used for decades to support oil prices. His proposal has been dismissed by rivals as illegal and unworkable. Iron ore producers and analysts say any cuts to output would likely be offset by competitors rushing to fill the gap.

The Reference Shelf

  • The Minerals Council of Australia, an industry trade group, has a website explaining how iron ore mining benefits Australia. Fortescue Metals backs a rival campaign.
  • Australia’s central bank analysed the effect of the mining boom on the nation in a 2014 research paper.
  • The International Monetary Fund considered the impact of slower Chinese growth on metals markets and iron ore in an October 2015 briefing paper.
  • A Rio Tinto video shows its iron ore moving from mines to ports in Western Australia and a BHP film tours the remote operations center that controls its sites.
  • Bloomberg’s 2012 profile of Gina Rinehart, Australia’s richest person, whose father discovered some of the country’s key deposits.
  • The think tank Chatham House examined the potential for anti-competitive practices in iron ore in a 2014 study.

First published Dec. 22, 2015

To contact the writers of this QuickTake:
David Stringer in Melbourne at dstringer3@bloomberg.net
Jasmine Ng in Singapore at jng299@bloomberg.net

To contact the editor responsible for this QuickTake:
Leah Harrison at lharrison@bloomberg.net