Bernstein: Iron ore falls below $90 as supply growth and high freight rates pull in opposite directions

Why does iron ore remain under downward pressure after falling below $90?

Iron ore has traded broadly at $100–$110 per tonne since the summer of 2024, recently falling below $90. Bernstein expects supply growth to outpace demand over the coming years and, with inventories at Chinese ports potentially continuing to decline, prices could fall to more than $80 per tonne.
In the first half of 2026, cyclones in Australia and heavy rainfall in Brazil disrupted shipments, while inventory accumulation at ports also reduced the ore available to the market. Since the summer, port inventories have been released, easing market tightness, and the futures curve has shifted to higher prices for later-dated contracts than for near-term contracts.

Higher fuel costs and tight vessel supply amid the Middle East conflict have pushed up ocean freight rates. Freight from Brazil to China rose from $24 per tonne at the start of January to $34, while the Australia-to-China rate rose from $10 to $14, respectively 37% and 40% above their five-year averages.
Ocean freight accounts for 31%–41% of the cost of delivering iron ore to China, rising to 45%–55% when local transport is included. Higher freight rates therefore raise the cost of marginal supply, with long routes from Brazil and Africa particularly affected.
Using Bernstein's cost estimates and assuming diesel at $200 per barrel and the spot freight rates prevailing at the time, a China-delivered price of $90 per tonne would leave approximately 150 million tonnes of seaborne and Chinese domestic production capacity with negative earnings before interest, tax, depreciation and amortization, or about 9% of their combined capacity. Capacity would not exit immediately, but a prolonged period below this price could force some suppliers to cut production.
The firm therefore sees cost support around $90 when the macroeconomic environment is stable; however, recently weak Chinese demand has outweighed the effect of higher freight rates, and iron ore prices have continued to fall.

Assuming the WCS project ramps up at a pace similar to SimFer, Bernstein expects Simandou iron ore sales to rise from 9.8 million tonnes in 2026 to 52.8 million tonnes in 2027 and 87.4 million tonnes in 2028.
Vale is expanding its Serra Sul and Serra Leste projects, adding 20 million tonnes and 4 million tonnes of annual capacity respectively, supporting its goal of annual output of 360 million tonnes by 2030.
There is also a countervailing factor for near-term supply: negotiations between Fortescue and China Mineral Resources Group have stalled, and its sales in the first quarter of fiscal 2027 were 42.9 million tonnes, below shipments of 46.8 million tonnes. If the negotiations remain unresolved by the end of 2026, the company could cut production, partially offsetting new supply.

Iron ore inventories at Chinese ports fell from 165 million tonnes in March 2026 to about 152 million tonnes, still above the ten-year average of 137 million tonnes. Bernstein believes that if the Fortescue negotiations lead to further inventory accumulation, they could delay a return to normal inventory levels.
The property sector is still absorbing excess supply, and residential construction floor area continues to decline. The construction business activity index has rebounded from below 50 earlier in the year to a recent 50.3, a limited improvement. Steel exports appear to have plateaued at around 118 million tonnes a year, making it difficult for them to continue offsetting weak domestic demand.
In the 12 months through August 2026, China imported 1.3 billion tonnes of iron ore, up 6% year on year; port inventories were observed to be high and crude steel output to be falling over the same period. Crude steel output over the most recent 12 months has fallen to about 934 million tonnes from more than 1 billion tonnes in the first quarter of 2025. If steelmakers respond to the industry association's call to cut production and reduce inventories, declines in imports and inventories could put further pressure on iron ore prices.

Bernstein believes that although there is cost support around $90 per tonne, iron ore equities are roughly fairly valued. Increasing exposure would be more attractive if prices fell to more than $80, especially if port inventory drawdowns accelerate and new low-cost supply ramps up on schedule.
Companies with a high share of iron ore business, such as Fortescue and Kumba, trade below their respective five-year average valuations, reflecting market concerns that future iron ore prices and diesel costs will squeeze margins. Copper businesses help BHP and Rio Tinto offset some of the weakness in iron ore.
Bernstein maintains its outperform rating on Rio Tinto and market-perform ratings on Anglo American, BHP and Vale.