China’s Diminishing Demand for Iron Ore Results in Lower Prices from Australian Producers

Australia, the world’s largest exporter of iron ore which is, of course, used to make steel, has issued its latest forecast regarding the price for its precious product. 

Companies engaged in production of the natural resource will be charging less for the valuable commodity – as much as 11% less than what was charged in 2011 – because of dramatically slowing demand from China. 

As the world’s largest consumer or buyer of iron ore, any reduced demand from China is certain to impact prices. And that is exactly what is happening this year … in 2012. 

How much lower will prices actually be? The reduction in real dollars is likely to be significant. Consider the following … 

According to the Bureau of Resources and Energy Economics, the average prices this year for a metric ton of iron ore will be only $136. That’s a big drop-off from the forecast issued in March, just a few months ago, by the Canberra-based bureau. At that time, the prediction was that prices would average $140 a metric ton. And yet: 

The forecast is even worse when compared to the average price for iron ore charged by Australian producers in 2011. At that time, the cost for a metric ton was $154.

Clearly, 2012 iron ore production and sales will not be as good as it was the previous year. In truth, shipments to overseas buyers in 2011 reached 493 million metric tons; in 2012, it is anticipated that total shipments will not rise above 479 million metric tons. 

Will the slowdown in orders and sales last long … will it negatively impact the Australian economy? It remains to be seen. 

However, Latshmi Mittal, chairman and CEO of Arcalor Mittal, a major steel producer and buyer of iron ore recently stated that demand for steel and, by extension, iron ore, is not likely to recover anytime soon. 

Reduced demand has resulted in increasing supplies of iron ore – inflated inventories – for the companies that mine the product, most notably those in Australia and Brazil. 

China’s steel consumption may not rise above 648 million metric tons this year. And that number reflects a harsh, growing reality. In March, 2012, the forecast for Chinese steel consumption was a much more robust 657 million metric tons. 

So, what is the short term outlook? Simply stated, it is “shaky.” Chinese economic growth, once expected to reach 8.2% in 2012 is now expected to rise no higher than 7.9%. As a result, iron ore imports will grow at a rate of only 8% for the year, down from 10% just one year ago. And that is a sizable 20% reduction in demand.

Will all of this reduced demand cause hardship for the Australian iron ore industry and its thousands of workers? The quick and easy answer is: probably not. While production will be down, it will not disappear. Countries like China will still be placing orders … and buying. 

And as long as there are customers for the iron ore, Australian workers will keep their jobs and be able to cash regular paychecks. They just may have to cut back – a little bit – on leisure activities and expenditures.

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