The end of the last iron ore Super Cycle
in early 2014 hit hard especially when the price bottomed in late 2015 at less
than US$40/t. The pull-back depth and six-year span left forecasters with
protracted pessimism coupled with depressing price outlooks and a view that
seaborne market recovery, flooded by new mine projects was unimaginable.
The view was entrenched, even when iron
ore price topped US$120/t in mid-2019 and was interpreted simply as a one-time
impact after Vale’s tragic tailings dam failure from earlier that year. The
entrenched pessimism was so tenacious it blinded observation of steadily
improving fundamentals and development of a strong healthy market.
To the surprise of all market watchers,
iron ore price increased by 74% in 2020, remarkably outperforming all other
metals by a significant margin. As a result of iron ore’s upward price
trajectory over the last two years, industrial and financing market players are
being convinced of the demonstrated sustainable recovery so much so that the
dawn of a new iron ore Super Cycle is becoming a reality. Iron ore reached
close to US$180/t (62% Fe, CFR China) in December 2020, a level not been seen
for almost ten years and in 2021 through late January it has continued in the
range of US$170/t. The potential of a new Super Cycle is brought into greater
focus when quantitative easing coupled with massive fiscal stimuli are expected
to be the key tools for global economic recovery, in a post-COVID-19 world.
Pessimism at the bottom of the cycle was
not baseless in the context of demand. Protracted future low iron ore
prices were predicted starting in 2013 when demand from China (which produces
about half the world’s steel and consumes three-quarters of global seaborne
iron ore supply) appeared to plateau at a steel peak output of about 800M tpa
and also at a time when mainland China super-infrastructure projects were
reaching completion and its run-away property market bubble defused.
That “peak” plateau of steel output
persisted for 3-4 years (2013-2016) and coincided with China’s efforts at
deleveraging excessive debt, de-stocking inventories and reducing
capacity. With fiscal house cleaning complete, China resumed incremental
growth and by 2020 crude steel production exceeded 1Bn tpa, an increase of 200M
tpa over the prior plateau peak! This healthy growth worked its way into
the iron ore market and by 2020 provides the environment for a recovery and
dawn of a new super cycle, an opportunity unimaginable by many just a few years
previous. In fact, while steel output levelled during the peak, import of
iron ore never stopped growing.
On the global seaborne supply side,
pressure opposing a return of a bull market was even greater. When
Fortescue came into the iron ore market in the mid-2000s armed with a
disruptive plan to contribute ~200M tpa to the seaborne market, when the Big 3
contributed only a total of ~500M tpa. To maintain market share and to address
burgeoning China demand the oligopoly, which in a few years grew to four
players, embarked on massive expansions with about US$100B invested in the
expansion process while maintaining about 70% share of the seaborne market.
Over just a few years, the Big 4 doubled
iron ore production to over 1Bn tpa while reducing FOB C1 cash cost to about
US$15/t, seriously limiting potential new market entrants. They set the curve
cost so low that spot prices were not expected to return anywhere near the peak
of the last Super Cycle and the situation entrenched a pessimistic outlook of a
protracted bottom and long road to recovery. However, the Big 4 have not
committed new major expansion capital (other than sustaining capital)
Source: Resource World