SandS said..
Why has the price of iron-ore halved since 2009.
It's all just supply and demand, and the same thing happens in every unregulated market.
If there's money in it, then everybody gets into it, be it sheep, cattle, kiwifruit, wheat, coal,. oil,.. nickel,.. and iron ore.
When supply equaled demand, the price just went up with costs and inflation. This sets the long term underlying gradient.
When supply falls short of demand, in this case because of the recent demands from china, then the price goes up disproportionately to costs and inflation.
This was the big spike in prices we had in the previous decade. It was not the long term gradient.
This makes for big profits for a short period.
Big profits always draw in lots more providers.
As the new providers start production, the point is soon reached where supply exceeds demand, and the buyers can then bargain on the price.
Over the last few years, the new iron ore and coal projects have been coming on line and production is rapidly rising.
Having spent all that money on setting up production, the producers then race each other to the bottom on price, just to stay in business.
That's where we are now.
Producers who borrowed lots of money to start up or increase production will now be in the excrement because the banks still want the interest on borrowings.
Producers can only do this while they get more for the product than it costs to produce.
High cost producers will either need to cease production until prices improve, or if they don't have that option, they go broke.
Long term producers who have little or no borrowing can reduce costs to a minimum and plug on, operating on a reduced costs basis.
This is by reducing or stopping exploration and development and whatever other expenses which can be reduced while keeping production running.
This means that eventually, future demand will exceed production and then prices will again go up.
How long this takes will depend on how many producers go broke and reduce supply, and long it takes for new markets to be established and drive up demand for the product.
