Photographer: Brendon Thorne/Bloomberg

Iron Ore Market Faces Extreme Volatility for Couple of Years

  • Developer Iron Road sees transition in China’s steel industry
  • China’s ore stockpiles may take a year to return to normal

Iron ore markets are heading for a very bumpy ride in the next couple of years, marked by significant price swings as the steel industry in China restructures, according to the developer of a planned $3.7 billion mine in Australia.

“Extreme volatility is going to be a hallmark of the market for at least a year or two,” said Andrew Stocks, managing director of Iron Road Ltd., whose partner in the mine, port and rail project is China Railway Group Ltd., the world’s second-largest infrastructure builder. “We shouldn’t be afraid of that, that is just the way it is.”

Iron ore has swung from a bear to bull market all within three months, rebounding from a year low of $53.36 a metric ton last month on a surge driven by mills in China boosting purchases to replenish inventories, with higher-grade ore in demand. This volatility is the result of the Chinese market transitioning to a cleaner, leaner production phase, according to Stocks, who sees prices averaging about $70 a ton over the longer term.

“You have got a fair bit of iron ore around the world,” he said in an interview June 29. This oversupply has led to record stockpiles sitting at ports and mills that may take a year to recede to a reasonable level, he said.

BHP Billiton Ltd. last week said it expects a smoothing out of the recent volatility. The addition of low-cost supply coming from rivals including Vale SA’s S11D project will see fewer short, sharp shocks in the price, it said. Goldman Sachs Group Inc. says prices are heading lower and Citigroup Inc. forecasts a slump back to the $40s.

Ore with 62 percent content delivered to Qingdao has jumped about 20 percent from the year-low last month and is trading near the highest level since early May. Prices were at $64.29 a dry ton Monday, according to Metal Bulletin Ltd.

Iron Road is in talks with China Development Bank, Industrial and Commercial Bank of China Ltd. and China Construction Bank Corp. about providing up to $3 billion in financing for the project that will produce about 20 million tons a year of iron concentrate, a higher grade product, for at least 25 years. A decision may be made within six to nine months, Stocks said. 

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