(Aaron J. Brown)
Just over three weeks ago, global iron ore prices were trudging along in the doldrums just as they had since last year. Below $50/ton, iron ore costs more to mine here on Northern Minnesota’s Iron Range than it’s worth. In simplest terms, that’s why this region’s mines have struggled since the spring of 2015.
As 2016 began there was talk of a temporary rally, which was starting to appear. Yet analysts said not to get too excited.
Then just over a week ago China laid off 500,000 steelworkers as part of a bigger deindustrialization move that would put millions of people out of work. Simultaneously, the U.S. Commerce Department announced big tariffs on Chinese steel. This signaled a coming slowdown in foreign steel imports.
Now, just this week, iron ore prices rallied faster than they ever have before, hitting $62.50/ton yesterday. Those prices, if sustained, would begin to provide tremendous relief to iron mines in Minnesota.
As you see in this Bloomberg piece by Jasmine Ng and Jesse Riseborough, this shocking recovery has completely befuddled the markets. All of the problems related to global oversupply of iron ore remain. China is by no means stable enough to sustain growth. Yet, all of a sudden, mining stocks have shot up as prices for commodities like iron ore, oil and the like have suddenly turned around.
But as the same piece points out, respected international watchers of iron ore still predict the price to come back down. This is, they say, the bouncing of a ball that will eventually level out.
See this excerpt from the Ng and Riseborough piece (bold is my emphasis):
Iron ore has powered higher in 2016 as steel prices have have strengthened, undermining forecasts for further losses driven by mounting low-cost supply from Australia and Brazil and weakening demand in China. At the annual National People’s Congress at the weekend, the authorities said they’d allow a record high deficit and higher money-supply target to support growth of 6.5 percent to 7 percent. At the same time, they also vowed to help cut overcapacity in steel, potentially curbing demand for iron ore.
“There may be some short-covering in the futures markets today,” said Xu Huimin, an analyst at Huatai Great Wall Futures Co. in Shanghai, referring to investors closing bets on declines. “The crazy surge in futures prices has surprised traders and steel mills, as they haven’t seen a corresponding increase in physical orders.”
Another analyst in the story describes this rally as “based on sentiment.” In other words, traders want steel and commodities to be stronger because that fuels so many other parts of the economy. But that’s not jiving with the same fundamental lack of demand on the world stage.
Again from the Bloomberg piece:
Recent gains in iron ore probably won’t last, Goldman Sachs Group Inc. said in a report received on Monday, forecasting a drop back to $35 a ton in the final quarter. This year’s rally has been driven by rising steel prices in China, a reversal of the normal relationship seen between the raw material and the manufactured product, Goldman said.
“We expect the current rally to be short-lived,” analysts Christian Lelong and Amber Cai said in the note, which was dated March 6, predicting further growth in iron ore supply in the quarters ahead. “The causality will revert sooner rather than later, and steel raw materials will one again drive steel prices rather than the other way around.”
As I said in my piece a couple weeks ago, what will really drive a return to “normal” in Iron Range mining will be the resumption of orders by American steelmakers. That hasn’t happened yet.
Meanwhile, the new normal will still include fewer workers than were in the mines before this crisis hit. That’s the most predictable part of the booms and busts on the modern Iron Range.
Hi Aaron –
Thanks for keeping up on all of this, for all of us. A reminder, however, that all iron ore is NOT alike, so I take issue with your statement above of “Below $50/ton, iron ore costs more to mine here on Northern Minnesota’s Iron Range than it’s worth. In simplest terms, that’s why this region’s mines have struggled since the spring of 2015.” Not necessarily so. Isn’t it more likely that the customers of the Minnesota and Michigan iron ore mines have closed up shop, or slowed down considerably, because there is so much cheap steel to be had through (often state-subsidized) imports? (sort of like why people shop at Wal-Mart instead of a more expensive local outlet). Minnesota’s current final product contains somewhere between 65-66% Fe, and is EXTREMELY consistent in both physical and chemical characteristics, this the result of almost 100 years of on-going taconite research right here in Minnesota. FYI – absolute maximum Fe content of pellets made from magnetite is 72% Fe.
The two market prices most often quoted in the iron ore news are for 62% Fe fines and 58% Fe fines. These are the grades of ore that are being produced in West Australia’s Pilbara region today for the Chinese market. Both of these iron ore products need further (and environmentally very expensive) refining before being available to blast furnaces, thru sintering, a process that makes/agglomerates larger lumps out of small ore particles. Even the higher-quality 62% Fe Fines product falls far short of the 65-66% Fe quality of iron ore pellets made in the U.S., and, with the added environmental costs of running it thru a sinter plant. 58% Fe fines and 62% Fe fines have no market whatsoever in our modern North American steel industry today.
Those ore grades were dropped from the North American steel industry in the 1960’s, because we were running out of it and, more importantly, it was supplanted by the very superior qualities of iron ore pellets for the modernizing steel industry here. This modernization has continued for the last 50-60 years, pellet quality today is far superior to that of the first production runs at Reserve and Erie in the 1950’s. This has been done through increasing efficiencies desired by steel producers, and through regulatory agencies (and the public) demanding better pollution control and fewer emissions at steel mills.
Back on December 8th, 2015, Frank Langfitt, NPR’s veteran international reporter based in Shanghai, did a piece entitled “China’s Steel Industry Is a Classic Tale of Overbuilding”, which touched on the environmental costs of the cheap steel which makes up a large proportion of the steel imports available today. He states “Today in Beijing, it’s awful. There’s a red alert. Schools are closed. And a lot of China’s steel mills, they’re really energy inefficient. They emit up to 12 times more carbon dioxide per ton than a lot of modern mills that you’d find in the U.S. And actually, fewer mills would be good for our lungs and a lot better for the planet”.
So, from a global environmental standpoint, for the sake of the Chinese people’s health, AND the global atmosphere, AND for our iron mining cultural and resource stronghold here in northern Minnesota and Michigan’s U.P., we should do all we can to PROMOTE the continued mining and processing of our region’s iron ores. 12 times the CO2 emissions? Purchase steel with an environmental conscience, like we do (or like we try to do) with all of our purchases. Employ more Minnesotans in the process. We still have resources here that measure in the billions (with a b) of tons. Maybe levy an environmentally-based steel import duty? Good for all of us.
Thanks again for all of your good reporting work, it is much appreciated.
Cheers –
PKJ
Great information thanks for taking the time to write this.
It is my understanding, however, that the cost in dollars — not environmental degradation from sintering — of usable ores from the Range is substantially higher than the cost in dollars for the Australian ores at furnace ready grades. Unfortunately, metal users are usually more interested in dollar costs than environmental costs. All your environmentally based arguments are true, but not seen as relevant for many people buying steel products — as you may recall we had a recent US senatorial election in which the nominee of one of the major parties argued that if Chinese steel pipe was less expensive, US oil and gas pipelines should use that steel, not the more expensive American pipe. In Minnesota that contributed not only to his own loss, but to the loss of his party’s 8th congressional district candidate, but in most of the US that would probably be seen a a reasonable idea, since end users of gas and oil products would be more interested in holding their costs down than in arguments against Chinese steel.