The iron ore market has risen to “bubble” levels that will burst as new mines create oversupply of the steelmaking raw material, according to Baosteel Group Corp, China's second-biggest mill.
“There is a bubble in this market, many are gambling, making acquisitions and investment expensive,” Chairman Xu Lejiang said in an interview in Shanghai, without saying when prices would drop. “Everyone who has money is rushing in to invest in iron ore.”
Vale SA, Rio Tinto Group and BHP Billiton Ltd, the three biggest suppliers, plan to spend $45 billion on mines. Global exports of iron ore may gain 28 per cent to 1.4 billion tonnes by 2016, the Australian Bureau of Agricultural and Resource Economics and Sciences has forecast.
“The reason the big three keep spending is that they probably think growth in India, Brazil, Russia and South Africa will be sustained, and also because they believe the return on their input would beat those blind investments” by smaller rivals, Xu said.
The biggest losers from the new mines may be the speculative companies that haven't yet started production and their investors, Xu said.
“Some investors are simply making money by trading the iron ore projects before seeing actual output,” he said. “Iron ore prices will definitely fall at some point because the supply-demand situation will have a turnaround.”
Prices Surge
Demand from steelmakers in China spurred an almost threefold jump in iron ore prices since 2008, driving a surge in producers’ valuations. The Bloomberg Global Iron Ore Mining Index of 30 iron ore companies have surged four-fold since 2008.
“In Australia, South Africa and America, I've seen a lot of investors who only 'dig' iron ore on the stock market, they will never see physical output from their mines,” said Xu.
The average profit margin of Chinese steel makers was 3.5 per cent in the 2010, the lowest of any industry, because of overcapacity and rising raw material costs, according to the government. That's about a tenth of the margins the largest iron ore miners make, Xu said.
China's economy may grow at a slower pace in the next five years, curbing steel demand, the China Iron and Steel Association estimated on April 29.
The cash price of 62 per cent-iron ore shipped to China's Tianjin port has almost tripled from November 21, 2008 when data became available, according to the Steel Index. It was $175.30 a tonne on May 19.
Price Decline
Iron ore may trade between $150 and $190 a tonne for the next three years, and may decline to a long-term average of $80 a tonne after 2017, according to Graeme Train, a Shanghai-based analyst with Macquarie Group Ltd.
"The structural drivers behind Chinese demand growth remain firmly in place and while we acknowledge new seaborne supply is coming to market, it will not come on fast enough to offset the high cost material at the top of the cost curve," Train said in an e-mail today.
