This story appears in the February 8, 2015 issue of Forbes Asia. Subscribe to Forbes Asia
Rarely has a wealth-destroying event been as predictable as last year's iron ore crash. No. 1 Gina Rinehart has been caught midconstruction with her Roy Hill mine. No. 10 Andrew Forrest has been caught with high debt. Clive Palmer has been caught mid-legal-brawl with a Chinese partner, and he failed to make this year's list.
Iron ore is used to make steel but sluggish growth worldwide, especially in China, means less demand for steel--just as a big expansion of iron ore supply is hitting the market. No surprise that iron ore prices have plunged by half in a year, to $70 a ton. Most producers ignored the warnings and pressed ahead with new mines. That's led to a destructive game of cost-cutting that only the cheapest can win, and that seems likely to be the biggest and most efficient iron ore miners, Anglo-Australian giants BHP Billiton and Rio Tinto, and the big Brazilian, Vale.
The three leaders are doing precisely what Saudi Arabia is doing in oil, flooding the market with low-cost ore to drive higher-cost rivals out of business, a process that should, theoretically, lead to prices recovering. But oil is different. It's somewhat easy to switch production on and off, meaning that the price can recover quickly. Iron ore mines take longer to mothball and even longer to reopen, which is why only a handful of small mines have closed.
The long-term outlook is grim. Hugh Morgan, a former CEO of Western Mining (now part of BHP Billiton), estimates that a full cycle of the iron ore market can take up to 30 years. He knows because in the 1970s he withdrew from iron ore production during a similar supply boom to meet Japan's need for steel. The next 12 months are likely to see prices continue to fall as mines where construction began in the boom years come online, including Roy Hill and Anglo American's Minas Rio mine in Brazil. UBS forecasts $66 a ton this year; Citigroup sees $58 a ton, a price that's below the break-even point of most projects not controlled by the biggest miners. --T.T.
