Iron ore prices registered their second biggest percentage fall in a single day on Monday when the benchmark price tumbled by 8.3% to close at $104.7 per tonne. This represents an 18-month low for iron ore prices. The price drop came in the wake of disappointing Chinese trade data reported over the weekend. The data showed a steep decline in exports and renewed concerns about a slowing Chinese economy. The other factor spooking the iron ore market is the tightening credit scenario in China which has restricted the ability of steel mills to purchase ore. The fall in iron ore prices is itself acting as a driver for even lower prices because a lot of iron ore has been purchased using financing deals, and financiers are dumping the ore in the market as its value decreases.
The mining majors remain unfazed by this decline, claiming that it is a short-term phenomenon and there is no change in their long-term demand projections. Rio Tinto , Vale VALE -2.97% and BHP Billiton BHP -2.88% are best placed to ride out this phase since they have lower costs of production compared to other players in the industry due to economies of scale. Smaller companies with higher costs of production may not be so lucky.