Iron ore – iron law: Why open, competitive markets are best

Already a large and successful industry, over the last decade Australia’s iron ore industry saw a massive increase in demand from China, which created impetus for further investment and expansion in the industry. The most obvious sign of this rising demand was a boom in price. Prices rose from an average of US$30 per tonne over 1980 to 2005 to a peak of more than US$180 per tonne in early 2011.

This price boom came from China’s rapid economic development while the rate of expansion of global supply of iron ore was limited. The boom in price engendered a predictable response from existing and new suppliers around the world. Investment in Australia alone more than doubled in the decade to 2010 and there were substantial investments made elsewhere. 

But the boom in price was temporary. Rising global supply and weaker demand growth have seen the price of iron ore fall by some two-thirds from its peak in 2011 to a current price (end July 2015) of between US$50 and US$60 per tonne. This large price fall is now causing stress among producers, who are cutting costs to stay competitive. The highest cost producers are the most vulnerable to the price drop. 

With iron ore revenues helping to underpin living standards and government budgets in Australia over the last decade, it is not surprising that the operation of the iron ore market has come in for greater scrutiny as prices have fallen. Some industry players, politicians and commentators have pushed for some form of government or parliamentary review of the industry.

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