Goldman Sachs announced that the cost curve of the iron ore market has significantly increased over the past two years, and the final production cost now acts as a price floor at around $90 to $95 per ton for short-term prices.
Decline in Iron Ore Prices
The price of iron ore has recently decreased to around $95 per ton, while its average over the past two to three years has been about $105 per ton. Analysts led by Paul Young attributed this decline to a more balanced market resulting from reduced production and exports of steel from China, improved sea supply from major mines in Australia and Brazil, and new supply from the Simandou mine in West Africa.
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Increase in Production Costs
Goldman Sachs analysts stated that the change in market balance coincided with rising industrial costs (diesel, transportation, labor) and a decline in product quality. The final production cost, which is adjusted at the 90th percentile in terms of quality, has increased by more than 20 percent over the past two years, reaching about $95 per ton, while this figure was around $75 per ton in 2021.
Goldman Sachs also noted that high mining costs and freight rates are key factors in this cost increase. For example, freight rates from Brazil to China have doubled to about $40 per ton.
The bank estimated that over 200 million tons of the existing supply at the $95 per ton price level has negative revenue, mainly consisting of low-quality exports from India and high-cost supplies from Australia, Brazil, Canada, Ukraine, and West Africa. Additionally, over 350 million tons at the $90 per ton price level will have negative revenue.
Regarding short-term pricing, analysts pointed to the state of steel demand in China in September and considered it the best time for iron ore. However, it is expected that steel production in China and iron ore demand will decline from October to November.
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