The iron ore price has been fairly stable over the past few months, trading around US$55 a tonne, but it could be about to sink, and sink fast.
Since July 1, the iron ore price has averaged US$58 a tonne, and traded just below that on Friday at US$57.28 a tonne.
Reasons for the stable price are strong steel production in China, replacement of higher cost, low-grade supplies with higher grade ore – mostly from Australia and Brazil – and an oversupply not materialising.
But those factors could be about to change significantly.
Chinese steel exports fell 2.9% in September, compared to August, and 25% lower than the same period last year. The UK, European Union and US have become very sensitive to the threat of cheap imported Chinese steel on their local industries.
The US increased tariffs on cold-rolled Chinese steel imports in May 2016, according to Vivek Dhar, an analyst at Commonwealth Bank. And the European Union also increased tariffs earlier this month. If steel producers continue to produce at current levels, China may be unable to absorb the additional supply, and producers may have no choice but to cut production.
Dhar also warns about the potential for weaker domestic steel demand in China, as the country tries to slow property price growth. So far though that hasn't had much effect on the iron ore price.
Meanwhile, supply from the world's major iron ore producers Rio Tinto Limited (ASX: RIO), BHP Billiton Limited (ASX: BHP), Brazil's Vale, Fortescue Metals Group Limited (ASX: FMG) and Gina Rinehart's Roy Hill mine will add an additional 75 million tonnes in 2017, up from the additional 55 million tonnes they added this year according to Dhar.
Now that could easily replace more high-cost low quality domestic Chinese ore, but if it doesn't, then the iron ore price will come under pressure.
Should that happen, the miners could see much of their share price gains so far this year evaporate.
