Iron ore’s train wreck

The widely observed slow down in China’s property and infrastructure sectors has meant that the 839 million tonnes of steel being produced in China annually is not being absorbed by the construction industry. In fact residential property construction (which demands the highest proportion of steel), commercial and industrial have all entered a period of steady declining demand. Total steel consumption in China is forecast to fall from 756 million tonnes (mt) last year to 728mt this year - leaving an oversupply to be dumped on global markets. For Australia and it’s iron ore sector, the ramifications cannot be overstated. The two largest marginal producers are Fortescue Metals Group and Vale and both companies are highly leveraged and free cash flow (FCF) negative. To top it off, the race to reduce operating costs is also deflationary for the iron ore price. When the iron ore price traded at $140 we suggested $40 was a possibility. Well, here we are, and we believe the price could still halve. Read more at our blog here: (VIEW LINK)