How low can iron ore go? We’ll find out

To paraphrase an old cliche, do you want the good news or the bad news?

Well, the bad news is that a recent commodities forecast by BMI Research predicts iron ore prices will find their floor in 2016, with prices falling further from their current lows through next fall. Iron ore is expected to trade at $35/ton on the open market sometime this year.

That means Mesabi Iron Range mines, which produce iron ore for more than $50/ton, will remain under duress while American steel competes with cheaper steel from other parts of the world. The U.S. government is slowly but surely blocking steel dumping where it can, but the complex nature of the problem makes this a challenge. Even if you manage to stop forms of dumping, the competitive pressure of cheaper ore in other parts of the world will remain a factor for a long time.

So what’s the good news? The same forecast predicts iron ore market conditions to improve in the fourth quarter of this year, with modest price increases and some stabilization of oversupply in China. Further, not all analysts see iron falling that far. There was an upward swing in prices this week as Chinese steelmakers placed big orders.

However any real market impact from this will probably remain unseen until 2017. And BMI doesn’t seem optimistic about iron ore reaching $50/ton until 2020 or beyond, something that fits with what other analysts are saying, too.

What this would suggest is that mines and mining companies that manage to survive until 2017 may endure this current market downturn. I started the year worried that Cliffs would go bankrupt and U.S. Steel would rattle apart. These outcomes now seem less likely, though no company can truly be called “safe” under these conditions. Further, the survival of the companies does not mean mining employment will return to what we would call “normal.”

A daily review of international news about iron ore and steel is very educational, and not always in terms of economics.

The first thing you realize is that iron ore from Minnesota and Michigan barely registers on the the global iron and steel market. We don’t really produce that much ore and we don’t compete with the largest companies in the world.

Minnesota iron ore matters because of its relationship with North American steelmakers. If American steel is doing well, chances are Northern Minnesota’s iron industry is, too.

Over the long run, though, we see two problems.

First, American manufacturers have increasing options for cheaper imported steel. Yes, steel dumping (selling steel for less than it costs to make) won’t last forever, but cheap steel from other places will last a long time.

Second, American steel companies won’t replace their blast furnaces. All new steel production uses electric arc furnaces. That means that no matter the market conditions, Iron Range ore will need additional processing to be salable over the long run.

We have heard about Iron Range mines exploring and developing direct-reduced iron pellets. More accurately, many of these projects would actually produce “DRI ready” pellets that would need reprocessing before becoming steel.

To wholly convert all six existing taconite plants to DRI would require billions of dollars. American mining companies do not have billions of dollars sitting around. And the government is unlikely to invest such funds for myriad reasons.

The Iron Range is very familiar with booms and busts. Mines that were running hot suddenly turn cold when demand drops, often all once. The most pernicious thing about this current situation is that it isn’t a sudden, total stoppage. Rather, it’s a slow strangulation. Instead of another big boom waiting just around the corner, we are only promised the ability to survive, for a time, in a much nimbler market.

If recent response to this information is any guide to the future, I’ll add here that what I’m saying is not “anti-mining.” These are facts of our situation. If we want to maintain communities, schools, and families in this region, we need to plan for a more complex economy, where diversity is something to embrace, not fear.