São Paulo – The prices of iron ore have plummeted in 2014 and specialists are expecting no improvement in 2015. The commodity is a mainstay of exports from Brazil to Arab countries and its prices influence Brazil’s bilateral trade with the region. “There is no improvement in sight,” says the Economics and Politics professor at Faculdades Integradas Rio Branco college, Carlos Eduardo Stempniewski, regarding iron ore prices for next year.
A tonne of the commodity was selling for US$ 130 early on in the year, dropped to US$ 80 in October and to US$ 70 by November. The main reason, according to the economist Bruno Rezende, from consulting firm Tendências Consultoria Integrada, is excess production capacity. Ore prices had been on the way up since 2008 and sold for as much as US$ 150 by mid-2010. “[The price of iron ore] gave rise to a strong investment cycle, particularly in Australia, but also in Brazil,” says Rezende.
The economist explains that the market for commodities such as ore often behaves cyclically. Whenever demand outstrips supply, prices climb, fuelling investment. The increased production pushes prices down and the cycle is reversed. This year, the leading producers have released surplus product onto the market. In 2015, Australia will sell larger volumes and 2016 will see the Brazilian mining company Vale’s Carajás project go online. These are the outcomes of investments planned during market booms.
On the consumption end, demand from China keeps climbing, albeit at a slower rate. The market was expecting prices to increase somewhat in late 2014, considering the possibility that Chinese mining companies would exit the market due to low product prices. Mining companies in China retain a market share ranging from 15% to 30%, but most operate at a loss, and this scenario deteriorates further as prices go down. However, they have not retired from the market as expected, says Rezende, who believes some sort of government subsidy is being given.
Furthermore, major new mining projects are way more efficient than old ones and bring down production costs, putting additional downward pressure on prices, according to Rezende. “Lots of projects are poised to go online in Australia,” says the economist, who expects a sluggish scenario.
For his part, Stempniewski claims the prices of other mineral commodities have also plummeted this year and ascribes this to a global scenario where the European economy has failed to recover, the United States are posting lacklustre growth (and, according to him, the US have no relevant economic ties with Brazil) and China is growing at a slower pace than it did in the past.
The professor criticizes the fact that Brazil has placed so much emphasis on China, which has other supplying countries closer at hand, such as Oceania. “The criterion for purchases has changed. In the past, large purchases were made to last one or two year,” says Stempniewski, warning that now, smaller amounts are bought to last for shorter periods of time. Therefore, he explains, if a sudden need to increase production comes up, it is easier to import from nearer producers.
The professor at Faculdades Integradas Rio Branco stresses that focusing on China was a commercial strategy error on the part of Brazil, which should have worked on other potential buyers. “Too much emphasis was placed on China,” he says. From January through October this year, Brazil exported US$ 22.2 billion worth of iron ore and concentrates, of which US$ 10.5 billion went to China. The second leading importing country is Japan, at US$ 2 billion.
Oman, an Arab country in the Middle East, the sixth leading buyer of Brazilian ore, purchased US$ 637.9 million worth of the product from January to October this year, according to data supplied by the Brazilian Ministry of Development, Industry and Foreign Trade. In all, ore exports from Brazil were down 15% from the comparable year-ago period.
*Translated by Gabriel Pomerancblum
