Iron ore is an essential component for the global iron and steel industries. Almost 98% of mined iron ore is used in steel making. About 50 countries mine iron ore, with Australia and Brazil dominating the market share for exports.
Mines in Michigan and Minnesota account for the bulk of iron ore production in the United States. In 2019, U.S. mines produced 48 million metric tons of iron ore. Australia led production with 930 million tons, followed by Brazil with 480 million tons. In 2019, global prices for iron ore averaged $112.15 per ton, an increase of 21% from $93 per ton in 2018. Prices were $88 per ton as of March 2020.
- Iron ore is the key input of refined iron and steel products.
- Prices fell to a low in 2015 as steel demand in China weakened.
- Investors can gain exposure to iron ore price fluctuations by investing in public companies that extract iron ore or use it as a key input in their business.
What Is Iron Ore?
Iron ore is the third most common element making up the Earth. The principle components of iron ore are hematite and magnetite. Taconite is a low-grade iron ore. Iron ore is not strong enough for construction and other purposes, so raw iron is alloyed with other elements such as tungsten, manganese, nickel, vanadium and chromium. The steel made from iron ore is used in construction, automobile manufacturing and other industrial applications.
The U.S. is estimated to hold 110 billion tons of iron ore representing 27 billion tons of iron. Most of this is taconite located in the Lake Superior district of Michigan.
Over the past decade, the price of iron ore has fluctuated wildly. Prices peaked at $187 per metric ton in February 2011, then plunged to about $41 per ton in December 2015. As of March 2020, prices were about $88 per ton.
The price collapse was largely attributed to a drop in steel demand from China. The country purchases nearly two-thirds of the seaborne iron ore supply, which supports the businesses of major producers such as BHP Billiton (BHP), Rio Tinto (RIO) and Vale (VALE). In addition, these companies have access to low-cost iron ore deposits and benefit from economies of scale. As they ramped up production, the market went into oversupply, which forced high-cost iron ore mines to scale back production or fold.
Cost is Key
Operating costs of the top iron ore producers are among the lowest in the world. A fully commercial iron ore mine requires heavy capital investment in infrastructure such as rail lines and heavy machinery. Other factors impacting cost include the type of metallic iron that is economically retrievable at the mining site, distance to market, government regulations and fuel costs.
In the final quarter of 2019, Fortescue Mining Group (FSUMF) led its peers with a reported cash cost of $12.50 per ton. This compared to the $14.50 per ton cash cost reported by Vale. Rio Tinto had a cash cost of $14-$15 per ton, while the figure was $13 per ton for BHP Billiton.
Large Players Dominate
A few key players dominate iron ore supply and demand. The top producers are listed below:
|2019 Global Iron Ore Production|
|Australia||930 million tons||37.2%|
|Brazil||480 million tons||19.2%|
|China||350 million tons||14%|
|India||210 million tons||8.4%|
|Russia||99 million tons||3.96%|
|Rest of World||431 million tons||17.24%|
|Total||2.5 billion tons||100%|
Source: U.S. Geological Survey.
Though China was the No. 3 iron ore producer, it was also the top importer, buying up 63% of the global trade. Japan was the second-largest importer, purchasing 8.3% of global trade, followed by South Korea at 5.1%.
The top exporting countries were Australia, which sold 52% of the global trade, Brazil with a 22% share and South Africa with a 4.3% share.
Iron ore mines belonging to BHP Billiton, Rio Tinto and Fortescue Metals Group are located in Australia, while Vale has operations in Brazil.
The Bottom Line
Large economies of scale benefit the biggest producers, who can afford to weather iron ore price fluctuations. This allows them to take market share from smaller players that have higher costs. Global steel demand is expected to remain healthy, rising 1.7% to 1.8 billion tonnes in 2020.
The long-term investment plans of the top three iron ore producers show that they intend to reduce costs further and increase production aggressively. Over the long term, the low-cost iron mines could potentially fill the gap that appears as smaller companies go under. The gain in market share would likely benefit margins, operating cash flow and profits. The threat of a new entrant changing the dynamics in the iron ore market, as it is today, is low.
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