November 24, 2017

Economies of scale save iron producers…for now

The decline in iron prices has always been a case of when, not if, and it’s all thanks to one reason (yes you have guessed it right!) – low demand from China. Indications are that a rebound might not happen anytime soon. The reason is that there is just too much the supply than the Chinese market can consume, so say the experts.

But big producers are not panicking yet and there’s a good reason. Mohad Taufik, a business development manager at Singapore-based brokerage, Philip Futures, told CNBC Online: “Prices will continue to fall because of economies of scale enjoyed by miners due to the large production volumes. Due to economies of scale, with lower cost, they can lower prices as well.”

At least for now, the world’s three iron producers – Vale, BHP Billiton and Rio Tinto – believe they can continue offsetting the price drop through low production costs. But for how long, it remains to be seen. However, if the price free-fall continues something might have to give.

The normal response to high supply and low demand is by miners is reducing production. Iron ore prices have lost almost 33% since the start of the year.

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