Please ensure Javascript is enabled for purposes of website accessibility

Iron Ore About to Get Mauled by Bear Market

By Rich Duprey - Apr 6, 2013 at 4:45PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Too much supply, too low prices will conspire to cause an industry meltdown.

Could the timing be any worse? Just as Rio Tinto (RIO -4.26%) and BHP Billiton (BHP -2.20%) are shedding assets to focus more intently on their iron ore business, analysts at Morgan Stanley (MS -0.83%) say the whole industry is about to get dusted from a supply glut. It anticipates that inventories will widen next year and expand through 2018, causing prices to tumble by more than a third just this year alone.

Hitting the brakes on the Orient Express
Of course, the miners aren't helping themselves, as each is bringing new mines online in Australia, along with top iron ore miner Vale (VALE -2.54%) opening one up in Brazil. Even though China's steel mills still have a voracious appetite when it comes to the ore, analysts expect that industry output will grow by only 2.6% this year, so it won't be enough to offset rising surpluses. Even China's own development and economic planning agency says the country will experience a surplus of 20 million tons, as it will import only about 4% more than it did last year.

China's economic growth has been slowing, and even though economists predict that GDP will expand beyond 8% this year, that's still a good deal below the better than 10% annual growth it's enjoyed for the past decade.

Anticipating the weak market, Cliffs Natural Resources (CLF -3.68%) announced last month that it will idle its Wabush Pointe Noire pellet plant in Sept-Iles, Quebec, by the end of the second quarter of 2013. One analyst frets that it will also need to sell its Australian iron ore assets to help pay down some of the $3 billion worth of debt it carries on its balance sheet.

The end is nigh
Morgan Stanley says 2013 will actually experience a supply deficit of around 81 million tonnes of iron ore, but next year it will grow to a 3.3 million tonne surplus and continue widening until it is 291 million tonnes in 2018. 

Factors that might mitigate when, or even if, the glut materializes include the length of time it takes to bring new mines online, but perhaps more crucial will be India's turning from a net exporter of iron ore into a net importer. The Wall Street Journal reports that mining interests in the subcontinent worry that they won't be able to export anything because the country's Supreme Court keeps rolling out export bans during a probe into illegal mining.

Despite all the doom and gloom, iron ore prices at $139 a ton have held up remarkably well, but Bloomberg believes that based on consensus analyst estimates, it could hit $90 a ton by year's end.

Iron Ore Spot Price (Any Origin) Chart

Iron Ore Spot Price (Any Origin) data by YCharts.

Down a mine shaft
Shares of miners have not fared as well, with BHP down 15% from its 52-week high, Rio off 22%, and Vale losing a quarter of its value. Cliffs has performed the worst of the bunch, with its stock down more than 72%. 

If the industry holds even close to what analysts expect, the bloodletting might not be over and the miners could end up worse than canaries sent into the coal mines.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Morgan Stanley Stock Quote
Morgan Stanley
$76.11 (-0.83%) $0.64
Cliffs Natural Resources Inc. Stock Quote
Cliffs Natural Resources Inc.
$15.18 (-3.68%) $0.58
BHP Group Stock Quote
BHP Group
$52.94 (-2.20%) $-1.19
Rio Tinto plc Stock Quote
Rio Tinto plc
$57.28 (-4.26%) $-2.55
Vale S.A. Stock Quote
Vale S.A.
$13.79 (-2.54%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.