The problem with iron ore

Even blind Freddy knows world is awash with IO just as steel production starts falling. But many hope our top class mines will ride out the downturn and maintain profits by increasing production whilst inefficient smaller producers go under.

So make less margin/ton but sell double the amount of tons and it all compensates esp as ramping up prod lowers cost /ton produced. It sounds reasonable/logical but need to bear in mind this key aspect. Miners and esp those facing the current macro are 'price takers' not 'price givers'. Hence, buyers of IO look at the tidal wave of IO streaming at them and know what they cost of prod of each mine is. They calculate how many producers can go bust without allowing a shortage to develop... and then pay just enough to keep the efficient producers in peak production.

Miners know all this hence the frantic race to out=produce their opponents over these past 12 months. So will the high production compensate? Miner X produced 100 tons 2 yrs ago at $60/ton. Sold IO for $160 making 100x100 = $10,000.
12 months ago same mine produced 200 tons at $50/ton. Sold IO for $110/ton making 200x60 = $12,000. Today same mine produces 300 tons at $40/ton. Selling IO at $60/ton = 300x20 = $6,000 in profits. i.e. the decline in IO price has been so massive and so rapid it has a huge effect on bottom line.

Mine X sez $60/ton is too cheap and contemplates reducing production from its lower grade ore. Costs no longer drop as efficiency decreases. But higher grade earns extra $2/ton. So now mine would earn 62-40=$22x250 = $6,000 profit... the same as when it sold 300 tons. BUT if IO price slips to say $55 then new figures are $15x250 = $3,750! That's a big drop and mine has far less cashflow. So most mines will not allow (overall) production to fall.

Hence, those mines that currently are profitable... will in aggregate... produce more than enough tons to compensate for juniors who go under. Look for firms who have some control over what they can charge for their product OR sell something that is in short supply i.e. the firm has 'pricing power'. Think of a giant supermarket chain that (just like China) can dictate to suppliers what they will pay for their breakfast cereal, laundry powder etc.