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Falling iron ore prices: supply chain optimization is an answer

A key commodity

Economists take multiple variables into account for their economic outlooks, with crude oil considered to be a key indicator among commodities. Next to crude oil, however, iron ore is the second most important indicator of the global economy’s shape. It is the most commonly used metal worldwide and is essential for the production of steel. Virtually every industry – including construction, automotive and machinery – uses it. The price of iron ore also tends to reflect the current and future health of China’s economy, since the country is the biggest importer worldwide. If you do business in the E&M (engineering and manufacturing) sector, the price per dry metric ton is a helpful guideline for forecasting future demand and your own profitability.

In the last twelve months, the iron ore market has experienced a seismic shift. Since the beginning of last year, the iron ore market has experienced a seismic shift. The spot price per dry metric ton has dropped from nearly $130 to $62 in June 2015.
a year-on-year decline of 48.3%. There are mainly two factors at play here: the Chinese economy has shifted from quantitative to qualitative growth, which has reduced the demand for construction, and the iron ore supply from major western producers is outgrowing steel production. The big-four iron ore producers – Vale, Rio Tinto, BHP Billiton and Fortescue – which command a 70% share of the market, continue to ramp up production, which has created a severe market imbalance.

A long price war

The situation is not going to change for a number of reasons. First, the top mining companies are prepared for a long price war. They are willing to keep production levels high to drive some of the smaller mining companies, which have higher production costs, out of the business. And the strategy seems to be working. Australia’s Atlas Iron has announced that it will halt mining operations.
Second, even if iron ore output is reduced, other producers will step in, keeping supply levels high and prices low. After all, experts do not expect demand to peak in China before 2026.

That said, the world’s leading producers are playing a risky game. A $5 dip in iron ore prices would shave $672 million in earnings from BHP and $674 million from Rio, according to estimates by Liberum Capital.

A way to cut costs

Today’s market environment means that mining companies and their suppliers from the E&M sector are under even heavier cost pressure than before. It’s time to come up with smarter answers to increase efficiency and cut costs. So, what do you need to do to keep your business profitable? One area, which has not been on many radar screens over the past decade in this industry, is logistics and supply chains. I see a huge potential for savings by optimizing today’s iron ore supply chains.

I think the sector can benefit greatly from logistics players such as DHL. Our scale, expertise and global reach can help mining companies and their suppliers to stay focused on their core business in these turbulent times, while reducing costs, improving quality and increasing efficiency.

Efficient supply chains require greater integration and collaboration. Control functions, shared data and segregated flows are key. And that’s precisely what’s lacking in many of today’s iron ore supply chains. Global logistics companies such as DHL can harness an extensive portfolio of capabilities built on decades of experience, expertise from other industries (first and foremost the Automotive sector) and a global network. With integrated logistics that support all facets of your supply chain, you’ll be better able to improve your cost base, focus on balanced growth and remain competitive in this key global market.

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