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Iron ore's enormous rally is prompting high cost producers to restart production

Image: Pablo Blazquez Dominguez / Getty Images.

The iron ore price has enjoyed a stellar start to 2016. The spot price for benchmark 62% fines has risen by more than 30% according to pricing from Metal Bulletin, sparking a renewed wave of optimism towards demand from the world’s largest user, China.

Iron ore miners have seen their share prices rocket, and it’s helped to underpin recent gains in the Australian dollar. However, the rapid price rise has caused another side effect, one that may soon start to weigh on prices should it continue: the resumption of production from high cost mines.

The chart below, supplied by Robert Rennie, Westpac’s global head of market strategy, shows iron ore exports from regions outside of Australia and Brazil, the two largest sources of seaborne supply globally.

On a three month annualised basis, it suggests that the recent price surge may have prompted previously uneconomic mines to resume production.

“The recent break higher in iron ore prices seems to be stimulating ‘other’ producers to return to market,” says Rennie.

“Exports from Sierra Leone disappeared last year as the Tonkolili mine was closed. It re-commenced operations in February. The Ngwenya iron ore mine in Swaziland looks like it is reopening; Cliff s Natural Resources announced last week that it will be restarting its iron ore pellet production in Minnesota. Last month, the Indian government announced it will drop the 10% export tax on 58% fines and abolish the 30% levy on lower-grade lumps.”

Rennie suggests that we’re likely to “see more in coming months”, adding that it should help to cap the iron ore price as a consequence.

If replicated by domestic Chinese iron ore producers, this would add to downside price pressures even further.

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