Iron ore: not a blast

Everyone knows the golden rule: those with all the gold make the rules. But these days it is the iron ore producers that have all the power. The three major miners of this key ingredient for steelmaking - Rio Tinto, BHP and Vale - have been producing as much as possible, given their relatively low costs. The result is that iron ore prices have halved over the past year. And despite a recent bounce (up 30 per cent over the past month), do not expect the direction of travel to change much.

Iron ore bulls have been clinging on to recent hints of production cuts to come from big producers such as BHP. This would be good news for smaller miners such as Fortescue which have called for the industry to restrain supply. But none of the majors has truly cut back. BHP, for example, has simply said that capital spending will not be as high as expected. But that is because the company is getting more bang for its buck - production targets have not been changed.

So much for the supply side. But news on the demand side is not much better. In China, the world's biggest consumer of iron ore, steel production has shown signs of peaking. Domestic steel producers, which cannot achieve great prices at home, have resorted to exporting in search of higher prices. Against that backdrop, they are hardly likely to ramp up their production (and hence their demand for iron ore).

None of this makes good reading for the big three iron ore producers, much less their higher cost rivals. Some have already gone bust; others will certainly struggle if iron ore falls back towards the recent lows of less than $50 per tonne. The big iron ore miners can make decent profits at the current price of about $60, thinks Bernstein. Others such Fortescue and Anglo American can just about breathe.

But do not put away the oxygen just yet. For one thing, Credit Suisse sees Chinese steel production falling until 2018. Also, there is little evidence yet of any big improvement in steel production elsewhere in the world. US steel production declined in the first three months of the year.

Yes, iron ore prices have had a good bounce. But wait this rally out.

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