Mongrel did a good explanation on iron ore market, however, i...

Mongrel did a good explanation on iron ore market, however, i dont quite agree with his inflation explanation. Commodities, for example, is more susceptible to supply and demand, then keeping up with inflation. Item that keeping up with inflation are normally those ready made products. Item like foods, eg corn, oats, became a commodity items that can mass produce, inflation do not muscle it pricing (not much over many years).

Before the iron ore mining boom, China, I believe is self sufficiency (try find sources to prove me wrong on this). Yes, china has higher ore cost, but china use their own ore rather than import from overseas, so China do not make an impact on global iron ore market price back then. So situation should be this, for example (pricing number do not reflect the real situation, just for illustrative purposes), china iron ore may cost USD 50 per tonne, they can get it cheaper via contract (back then global iron ore market on spot price doesnt exist) it with australia at 20 usd per tonne. However, either they are 1.not aware 2. china havent join free trade 3.china gov prohibition 4.steel marker still profitable producing steel using high cost ore, china do not import iron ore from overseas. Iron ore market was lackluster, such low pricing on iron ore was agreement made by the big 3 (vale, rio, bhp) with other steel makers from overseas and the reality is, iron ore was a bad business to be in, and global market was being oversupplied with iron ore back then, forcing big miners to lower their pricing so that they can find buyers. So essentially, there is no other significant player in the iron ore seller market besides the big 3. And over years, due to bad iron ore market, the industry is severely under investment.

Then China huge demand for iron ore came by, even today, over 60% of seaborne iron ore is exported to china. So china is pretty much the single biggest market force that push the iron ore price. The mining boom from 2008-2011 was caused by multiple of reason ranging from QE, overall commodity boom, to china huge demand. Suddenly, the market unable to supply china that much of iron ores due to years of underinvestment. However, i do believe such peak price will not longer happen again as higher cost producers coming into the game and increased the iron ore supply. Also low cost producers expand their production quantity, making the game even worse.

So how likely the price will drop back to USD 15 per tonne? Well, it depend on following factors (not all mentioned)

Demand: 1.china demand should be the first to take notice 2.global iron ore market demand growth esp from emerging market

Supply: 1.big 4 miners production and their production cost (as explained by Mongrel)

Price can drop to any price if there is no takers, however, do note that, the lower it get, the more production halt will happen until the lowest cost producer also halt their production...that would be USD 20 (according the mongrel chart)? Iron ore can drop to USD 15 or USD 5 per tonne, but those will only be sell by those who still make a profit with that price or anyone who willing or eager for an escape and willing to sell it at a loss. Globally, no miners will pump in more fresh production to the market as they will be incur losses for doing so. Inventory will pair down until the market is undersupply again and the market will overturn again. This is the dynamic, and is the same happened to oil market. Saudi is the lowest cost producer, 10 USD per barrel, anyone hoping for 5USD per barrel,....sweet dream.

However, armageddon scenario can also be happen with technological changes. Maybe in future deep sea mining become economically viable and the FE content is so high and the cost is so low until USD 5 still profitable....then the big 4 will face its biggest competitors in history. Or production automation kicks in, esp big 4 with their capital and R&D, they can produce day and night, lowering their cost further. This will put high cost producer like MGX in deep trouble.

At least for now, it is quite hard to believe IO will drop back to these low again in years to come, esp china road and belt initiative, and many developing countries esp india, still developing. Will we see the all time high again? maybe, who knows one day india got sudden shoot up to demand as much iron ore as china, and the market couldnt response in time, the IO price can be all time high again, dont limit IO price in certain range, there is no such range, only market dynamic.