Iron ore prices climb as steel prices dip

It’s why steelmakers find themselves in a profits squeeze, while miners are doing well but an uncontrolled coronavirus threatens to change all that.

Many American steel producers have been reporting thin or nonexistent profits and margins of late. United States Steel recently posted a fourth quarter loss of $680 million, while AK Steel announced a loss of $53.9 million. Nucor Corporation, the largest steel US-based producer, managed to squeeze out earnings of $107.8 million in the fourth quarter of 2019—but that was down 61% from the third quarter and 83% from the fourth quarter of 2018.

Last year was “challenging,” Nucor’s management said during an earnings call in late January.

Iron Ore Prices Up

There are several factors that play into the steel companies’ predicament—among them China’s economy, the tariff wars, and the coronavirus outbreak. But here’s another cause that hasn’t gotten a lot of play: steel prices are falling and iron ore prices are rising. Steelmakers that rely on the mineral as their primary input are feeling the squeeze.

Prices for U.S. hot-rolled coil steel has been declining for the past couple of years. In 2018, it fetched $828.46 per metric ton. That number fell to $603.52 in 2019, a decline of over 27%. In mid-February, steel was trading at $576 per metric ton, one percent lower than a month before. That price was down two percent year-to-date and down 15% compared to the same time last year.

Iron ore prices have a history of wild fluctuations, reaching above $125 per metric ton in 2013 before declining to as low as $45 in late 2015. Prices reached a five-year high of $124.50 in July 2019, before briefly declining in early February 2020 to $83 from January’s $92-level amid coronavirus fears. Since the February decline, iron ore prices have been climbing, and are expected to reach around $99 per metric ton by the end of March, according to Trading Economics, a provider of commercial and financial data, and over $105 by year’s end. 

There are situational as well as structural reasons for iron ore’s climb. 2019’s prices reflected a supply disruption in Brazil due to dam failures that caused over 200 fatalities and provoked a criminal prosecution. Prices also climbed as China imported the mineral at near-record levels. 

The structural part of the iron ore story is that global supply is controlled by just a few big players. According to the U.S. Geological Survey, the top five iron ore producing countries control about 85% of production and 73% of reserves. The largest iron ore reserves are in Australia, followed by Brazil, Russia, China, and India. The world’s largest producer of iron ore is China, followed by Australia, Brazil, India, and Russia.

The Big Four

Four companies dominate global iron ore production, together controlling over 70% of iron ore exports: the Anglo-Australian BHP, the Brazilian multinational Vale SA, the London-headquartered Rio Tinto, and the Australia-based Fortescue Metals Group. Company data indicate that the extraction costs for the big four range from $20.80 per metric ton for Rio Tinto to $51 for Fortescue. Smaller companies typically shoulder higher costs, anywhere from $60 to $120 per metric ton, according to some estimates.

It shouldn’t come as a shock that the producers with the lowest operating costs are in the best position to grab market share. Nor is it surprising that some smaller higher-cost iron ore mines have closed in recent years—including ones in Canada, China, and Africa.

The same thing is happening in Australia, where a report from Fitch Solutions, an economic advisory firm, predicted that Australian iron ore production will experience only minimal growth from 2020 to 2029, despite major new mines—operated by three of the big four—coming online next year in the Pilbara region of Western Australia.

The projected slow growth of an average of 0.7 percent per year—a 92% decline over the previous 10-year period—was blamed on closed facilities by smaller miners. “Majors continue to decrease costs and increase production in the longer term,” the Fitch Solutions report said. “We expect majors Rio Tinto, BHP and, Fortescue Metals Group to drive Australian iron ore production.”

With mineral prices climbing, and in contrast to the anemic performance of the steelmakers, Rio Tinto revealed its highest profits in eight years on February 26, with underlying earnings rising 18% to $10.3 billion in 2019. Fortescue Metals earned $3.2 billion in its fiscal year 2019, 263% above its 2018 levels. BHP recently reported its best results in five years, with profits increasing to $5.19 billion for the six months ending December 31, a 29% increase from a year earlier and its strongest result since 2015.

Vale SA, which is experiencing ongoing legal and operational problems, reported a $1.56 billion net loss in the fourth quarter of 2019, along with a 22.4% fall in fourth-quarter iron ore production compared to the same period last year. But at least one Wall Street analyst predicted the company’s return to profitability by the end of the year.

Of course, the coronavirus outbreak is a situational factor that could dim the currently bright prospects for the world’s major iron ore miners. Rio Tinto’s management, despite the company’s recent positive results, cautioned that “the next six months could bring some challenges.” And BHP officials indicated the disease could throw a monkey wrench into iron ore demand projections for 2020 if the fallout extended beyond March.

That’s a pretty short time horizon—and prospects for controlling the pandemic appear to be getting worse, not better.