Major iron ore producers will have to cut production like aluminum producers did in 1994 to halt the current slump in spot prices, investment bank Investec said in a note Tuesday.
"In our view if iron ore prices prevail at current levels something will eventually have to be done by the major producers to curb production," the bank's analysts, including Hunter Hillcoat, said.
It said even though Rio Tinto had recently declared it would pursue its plans for low cost expansion despite iron ore prices having fallen below the $40/dmt CFR China level, something had to be done about output.
The bank said its view on production cuts and the current supply glut reflected the "dire state of the iron ore industry".
Seaborne iron ore prices have almost halved since the start of the year, with the Platts 62% Fe Iron Ore Index, or IODEX, having fallen 46% to $39.05/dmt CFR North China Monday.
Both Rio Tinto and Brazilian mining giant Vale aim to produce 340 million mt of iron ore this year, vying for pole position in production of the steelmaking raw material.
Australia's second-largest iron ore producer, BHP Billiton, said in October its production expectations for the 2016 financial year from July 2015 to June 2016 remained at 237 million mt.
Investec said the state the iron ore market was reminiscent of conditions around the so-called Memorandum of Understanding signed by representatives of all major aluminum producing countries on January 28, 1994.
This was a response to "a grave, exceptional, and unforeseeable situation involving a considerable excess global supply of primary aluminum", the bank said, citing the US Geological Survey on the output cuts at the time.
"The current crisis in iron ore has all the same hallmarks -- in our view the only response may be to 'cut like it's 1994'," Investec said.
