(Bloomberg Opinion) -- Iron ore had a carousing 2019 — for all the wrong reasons. A fatal dam collapse in Brazil, followed by a tropical cyclone in Australia, battered production and sent prices to their highest level in five years. Early figures from BHP Group and Rio Tinto Group show just how much benefit both have reaped. With supply coming back, Chinese mills under pressure and Beijing’s infrastructure investment looking inadequate to keep the music going, prepare for a more sober 2020.
Production figures from BHP on Tuesday, as with Rio Tinto last week, will cheer investors and fuel hopes of one-time payouts. The average price at which BHP sold a metric ton of iron ore in the six months through December was just over $78, more than 40% higher than a year earlier. Considering unit costs that probably hover around an underlying $13 per ton, the level reported for its last financial year, that’s quite a margin — and quite some cash flow. It’s a similar story at Rio.
Unfortunately, it’s hard to see how such gravity-defying market levels can hold up. Iron ore futures in Singapore are currently trading above $90. While that’s below July highs, it’s still well above prices touched even after Vale SA’s Brumadinho disaster and Cyclone Veronica, which struck Western Australia in March.
Consider supply. Vale, a critical piece of the steel ingredient jigsaw, won’t report fourth-quarter production until February, but third-quarter output was already up 35% on the previous three months, and the Brazilian giant could return to pre-Brumadinho levels by 2021. All three of the big iron-ore suppliers — BHP, Rio and Vale — are working toward incremental though ambitious supply targets. In 2020, Bloomberg Intelligence estimates the three will add 44 million tons — a not insignificant 3% of the year’s projected output. China’s production, meanwhile, has also edged higher.
Demand isn’t quite as rosy.
Granted, there were some signs of stabilization in the world’s biggest steel producer and consumer at the end of last year. China’s industrial output in December beat forecasts to rise 6.9%, the strongest in nine months and a decent showing even accounting for work brought forward to compensate for an early Lunar New Year. Steel production hit another record last year.
The detail is less inspiring, as growth in the world’s second-largest economy cools to its slowest pace in almost three decades. While monetary policy remains helpful, there are signs that private companies are still struggling for funds. Key sources of demand for steel remain weak, from property and cars to manufacturing. Building starts, for example, were up 8.5% in 2019 while completions, an indicator of confidence, increased far more slowly. Even after a phase-one trade deal between Washington and Beijing, heavy tariffs remain in place, weighing on manufacturing.
All of that means iron-ore bulls need China to start splurging on infrastructure. Beijing has taken some measures to encourage spending, approving more projects and lowering capital ratio requirements. This isn’t a return to the bumper stimulus efforts of the past, though, judging by indicators such as fixed-asset investment. Local governments are saddled with plenty of debt, which remains a concern. Moreover, Bloomberg Intelligence estimates China’s public investment per capita is almost as high as that of advanced economies, suggesting it’s becoming harder for spending to have an impact.
Producers of high-grade ore, like the big three, may also find the premium that local mills will pay comes down as their margins come under pressure.
China’s economic priorities — including the size and scope of further stimulus — will be outlined in March, when the National People’s Congress and the Chinese People’s Political Consultative Conference meet. Miners can expect that, whatever the speed of decline, the only way is down.
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Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.
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