Iron ore oversupply coming?

Serious implications for our big miners

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published January 24, 2013 11:40 am AEDT

Massive pressure is coming to bear on the iron ore price, with analysts estimating that the world will have an oversupply of iron ore by 2015.

Just between our three biggest iron ore miners, production of iron ore is expected to reach more than 700 million tonnes per year within the next couple of years.

The 'third force in iron ore', Fortescue Metals Group (ASX: FMG) is ramping up production to reach 155 million tonnes per year. BHP Billiton (ASX: BHP) is expected to produce more than 180 million tonnes in this financial year, and now has the capacity to reach 220 million tonnes a year, after upgrading its infrastructure. The big daddy of Australian iron ore production, Rio Tinto (ASX: RIO) already produces 250 million tonnes per year, and is expanding output to reach 353 million tonnes by 2015.

Adding those numbers up, and you get total production of around 728 million tonnes per year.

Then we have the much small producers like Atlas Iron (ASX: AGO) targeting production of 46 million tonnes by 2017, while Mount Gibson Iron (ASX: MGX) expects to sell more than 8 million tonnes in the 2013 financial year.

Brazilian iron ore giant, Vale, already produces more than 300 million tonnes per year, and has additional mines coming on stream within the next few years.

Based on just those numbers, Australian iron ore miners, plus Vale, are heading for more than 1 billion tonnes of iron ore production in the very near future. Add in Indian, Chinese, African and other producers, and the world is heading for an oversupply of iron ore in the very near future.

Iron ore is primarily used to produce steel, and steel production is only expected to grow at low single-digits in the years ahead. The deputy secretary-general of the Metallurgical Mines Association of China recently forecast that by 2015, China's demand for steel will actually fall – not rise.

Last year, the China Iron and Steel Association cut its growth rate for the production of steel from 8% to 4%.

The Foolish bottom line

Despite daily fluctuations in the spot price of iron ore, the massive ramp up of production of the commodity around the world, while steel production is set to slow or even fall, pressure on the iron ore price is building. Whether it's a soft landing or a hard fall, the implication for Australia's iron ore miners is serious.

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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in BHP Billiton.

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