Iron Ore Prices

Iron ore market risks 'disaster'
DOW JONES NEWSWIRES SEPTEMBER 08, 2014 12:30AM

Iron ore prices are plummeting and demand is easing, but miners are digging up more and more iron ore.

Rio Tinto and BHP Billiton in Australia, and Vale in South America -- the world's top three iron ore miners -- are ramping up production in a bet that their enormous efficiencies of scale will allow them to profit, even though prices are now less than half what they were four years ago. The companies are also betting that the lower prices could force higher-cost competitors out of the market, giving them more pricing power in the long run.

Already Cliffs Natural Resources has hired bankers to sell its mines in Australia because it has difficulty competing with the major players. "The big three are in control, and there's not much you can do about it," Lourenco Goncalves, chief executive of the Cleveland-based company, said in an interview.

The developments are being closely watched by steelmakers in China, South Korea and Japan, the world's top three importers of iron ore, the key ingredient in making steel. Should the big players, which account for more than 60 per cent of all seaborne trade of the mineral, tighten their control of the market, they could exert greater pressure during price negotiations.

A spokesman for the Japan Iron and Steel Federation, Takefumi Nagamine, said the trade group has been concerned about the iron ore miners' oligopoly for several years. "The situation hasn't changed," he said in a telephone interview.

During the commodities boom of the last decade, there was enough demand worldwide that mining companies could confidently produce as much as possible and know that infrastructure construction in developing economies would absorb it. Iron ore production has continued to increase even as growth in those markets has slowed, along with demand for steel.

"China will not spend what it's been spending on infrastructure," Mark Cutifani, the CEO of Anglo American, said in an interview. "There are still plenty of buildings with no one in them."

And what China does and doesn't do matters to miners. The country imports two-thirds of all the iron ore that is traded between countries, so its demand drives prices. Anglo, another major iron ore producer, is also increasing production via a new mine in Brazil, but Mr Cutifani vowed to hold the line on future supply. The big three iron ore makers need to show discipline or "they'll pay a price," he said.

Also urging caution is Ivan Glasenberg, CEO of mining giant Glencore, which although not a major producer trades in iron ore. He notes that a quarter of the world's iron ore is now new production and the trend will continue over the next four years. "So we are oversupplying the market and that's what is killing the supercycle," he told analysts.

Global output by the top five producers --Vale, BHP, Rio Tinto, Anglo American and Fortescue Metals Group -- is expected to grow more than 40 per cent to over 1.5 billion tonnes by 2017, even though demand is expected to grow only 10 per cent to 15 per cent, according to Charles Bradford, who manages a metals research firm. The result is "going to be a disaster," he said.

BHP chief Andrew Mackenzie in a recent interview acknowledged that miners in some countries will suffer but he expects others, including those in Australia to prosper. "There will be winners and losers" among countries, he said.

Indeed, with iron ore prices slipping to near a five-year low under $US85 a tonne, several small and medium miners are under pressure. Labrador Iron Mines Holdings in Northeastern Canada this summer halted all operations, citing prices too low to accommodate costs. "Many medium and small suppliers will retreat from the market and reduce production," Winston Yue, a Shanghai-based iron ore trader, said.

Even though prices have fallen to less than half the highs they reached around $US190 in 2011, they are still over five times their level in 2004. With the cost of mining iron ore running on average at about $US50 per tonne and as low as $US30 for the most efficient miners, profit margins can be huge. Iron ore accounts for more than half of BHP's earnings, and around 90 per cent for Rio Tinto's and Vale's.

Paul Gait, an analyst at Bernstein, predicts prices will rise to $US105 a tonne, which is on the high end of industry estimates ranging from $US80 to over $US100 per tonne over the next few years. His rationale, in part: Rio Tinto, BHP and the other big suppliers are going to have so much capacity they'll be able to dictate prices.

"Iron ore is going to be a very good game for a long time," Mr Gait said.

That's why miners continue to expand capacity. In Brazil, Anglo American later this year will start shipping iron ore from its huge mine there, after years of costly overruns that reached $US6 billion. ArcelorMittal, the world's biggest steelmaker, is ramping up investments in iron ore mining in West Africa and Northern Canada. Vale increased production 13 per cent to 79.4 million tonnes in the second quarter.

At the center of the new iron ore boom is Australia, the world's biggest exporter, and specifically the sparsely populated Pilbara region of Western Australia. There BHP and Rio have secured massive deposits and invested heavily in fleets of driverless trucks, efficient blasting techniques and massive rail systems to get their ore swiftly to port and off to China.

BHP has spent $US24 billion over the past decade building up its network of mines, rail and port terminals in the Pilbara, where it controls more than 20 billion tonnes of iron ore or a century's worth of resources. It reported record iron ore production of 225 million metric tonnes from its Western Australian mines in the year through June -- up 20 per cent from a year earlier.

Marketing chief Mike Henry says he is well aware prices are headed lower as supply rises and China's growth rates slow. "It is baked into our plans," he said on a tour of the company's Port Hedland facilities in July.

Still, BHP expects the closure of unprofitable mines elsewhere to balance the market before it drops too far. BHP estimates up to 40 per cent of the 350 million tonnes China produces each year is very costly to dig up. "It's really important for the high-cost suppliers to shut in a reasonably efficient manner" as low-cost supply rises, Mr Henry said. "Otherwise you just see a compounding of supply in the market."

Producing iron ore for under $US50 a tonne, Rio Tinto is the world's lowest-cost major producer of the commodity, which it sells to steel mills and traders in China, Japan and South Korea.

Plans are well under way to expand its presence in the Pilbara region, where it operates 15 mines and the largest privately owned heavy-freight railway in Australia. Rio Tinto expects to have the infrastructure in place for an expansion to 360 million tonnes a year by mid-2015, from 290 million tonnes currently.

Supply is coming from other parties, too. Australia's richest person, Gina Rinehart, is building a new 55-million-tonne per year mine at a cost of $US10bn. ArcelorMittal has invested heavily in iron ore in recent years to reduce its reliance on others for raw materials. Chief Executive Lakshmi Mittal says he remains committed to increasing capacity 20 per cent next year to 84 million tonnes, even though the company recently cut its iron ore price forecast for this year to $US105 a tonne from $US120.

The reason: Mining represents 7 per cent of the company's sales, but 20 per cent of its earnings.

Iron ore, coal face chronic price pain, former BHP exec warns
THE AUSTRALIAN SEPTEMBER 10, 2014 12:00AM

Barry FitzGerald

Resources Editor
Melbourne
Sarah-Jane Tasker

Reporter
Sydney

FORMER senior BHP Billiton executive Alberto Calderon has warned Australia faces a permanent fall in prices for its major ­exports of iron ore and coal as growth in the Chinese economy becomes increasingly driven by private consumption.

And the Yale-trained professor of economics — one of the contenders for the top job at BHP that went to Andrew Mackenzie — said it would be wrong to pin economic hopes on the burgeoning LNG ­export industry because the gas was expensive, and there was a new supply challenge coming from Russia and the US.

Speaking last night at a Bloomberg forum in Melbourne, Mr ­Calderon painted a bleak outlook for Australia’s biggest ­export earners of iron ore, metallurgical coal and thermal coal, with the first two steelmaking raw materials. “On one side, we will see almost no growth in Chinese demand for iron ore, even if there is some growth in steel,’’ Mr ­Calderon said.

“On the other side, we are seeing a wall of iron ore supply being dropped in to the market by the large mining companies. It is not difficult to see why iron ore prices have collapsed and why they will go even lower.’’ Mr Calderon was previously part of BHP’s inner circle. Before leaving last year he was in charge of the ­aluminium and nickel division, as well as corporate development. He also continued on in a special advisory role to Mr Mackenzie for some time. His comments come as iron ore has collapsed from last year’s ­average of $US135 a tonne to a five-year low of less than $US84 a tonne.

Earlier in Sydney, one of Rio Tinto’s top executives warned of a continued challenging environment for thermal coal — the nation’s third biggest export — which is likely to expose a new source of pain for the resources sector.

Australia’s top three exports, valued at more than $100 billion annually, are all under severe price pressure. At its peak, thermal coal was priced at above $US130 a tonne, but it has fallen to around $US66 a tonne for coal shipped through Newcastle. For coking coal, also used in steelmaking, the price has fallen from more than $US300 a tonne to $US110.

Australia’s miners of the bulk commodities have been slashing costs to protect their margins but the price of thermal coal has hit a pricing point where it is expected that around 80 per cent of production is under water. “Coal producers here and around the world have taken a hatchet to their costs to survive and they’ll have to continue to do that over the foreseeable future,” Rio’s global energy boss, Harry Kenyon-Slaney said.

Mr Calderon said that with some certainty it could be that iron ore prices will revert to marginal costs, even overshooting in to the low $US70s for “some years’’.

Many iron ore producers would experience the same sort of pain that had for years characterised the aluminium and nickel industries, both of which China had worked at creating oversupply.

Mr Calderon noted that while 90 per cent of China’s energy growth used to be coal-based, it was now 80 per cent-based on ­nuclear, gas and renewables. “This is very good news for the ­environment and for climate change, not very good (news) for thermal coal,’’ he said.

Iron ore still overshadows metallurgical coal and steaming coal exports, coming in at about $US70 bn ($75bn) annually.

Mr Calderon said oversupply was the key factor in the price collapse. He stressed he was not talking about a contraction of the Chinese economy, rather a change in the mix of commodities required as China moves from its industrialisation phase to a consumer-driven economy. “The composition of growth will change significantly. Investment will not be the major driver of growth, it will be private consumption.’’ As China moves up the GDP per capita curve, there will be more demand for “middle income’’ commodities like copper, meat and corn at the expense of the “lower income’’ commodities of iron ore and coal.

“The challenge for Australia is how to move to the middle income commodities … Now is the time to dismantle the roadblocks to (again) allow productivity to increase and private investment to grow.’’

Iron ore price ‘will rebound by 2016’
THE AUSTRALIAN SEPTEMBER 10, 2014 12:00AM

Paul Garvey

Resources Reporter
Perth
RESPECTED Westpac chief economist Bill Evans has offered some hope to the under-siege iron ore sector, predicting a healthy rebound in prices over the coming two years.

Speaking at the Good Oil conference in Fremantle yesterday, he broke from the negativity pervading the sector to forecast a rebound in prices to $US100 a tonne next year ahead of a “probable” surge beyond $US120 a tonne by 2016.

The price has already slumped by more than 35 per cent to its lowest level in five years, eroding — and in some cases wiping out — the profitability of Australia’s iron ore miners. The slump has been blamed on a surge in output from Australia coupled with a cooling in demand from China, the world’s biggest consumer of the commodity.

Mr Evans admitted China’s economy looked “pretty sick”, with both consumer confidence and the housing market at or near record lows.

House prices in 95 per cent of China’s 70 largest property markets were falling, he said.

“This is the worst the housing market has ever been in China.”

But importantly, he said, it was clear that the central government was beginning to adjust policy settings in order to rejuvenate activity in the housing market.

“At the moment it’s not moving fast enough, but I think over the next few months that you’ll start to see a more aggressive policy approach in China. We’re starting to see a lift in credit, we’re also starting to see fiscal stimulus.”

He said authorities were lifting property purchasing restrictions in a number of Chinese cities.

The positiveness from Mr Evans came as former BHP Billiton executive Alberto Calderon gave a bleak diagnosis for Australia’s iron ore industry, predicting prices will slide to a level at which many smaller Australian ­producers will struggle to make a profit.

Mr Calderon, who up until last year was the head of BHP’s aluminium and nickel division and was an adviser to BHP chief executives Marius Kloppers and Andrew Mackenzie, said yesterday at a Bloomberg conference that he expected the iron ore price to remain at between $US70 and $US80 a tonne for the next two to three years.

Those levels would likely lead to significant pain for a number of Australian iron ore miners, based on the latest production cost forecasts from Deutsche Bank analyst Paul Young.

Mr Young yesterday said that at an average price of $US84, Atlas Iron would produce its iron ore at a loss while the margins of Mt Gibson Iron and Fortescue Metals Group would drop to 4 per cent and 7 per cent respectively.

Under Mr Young’s forecast, however, heavyweights Rio Tinto and BHP would continue to generate healthy margins.

Iron ore price collapse to cost big miners $10bn

THE AUSTRALIAN SEPTEMBER 11, 2014 12:00AM
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Barry FitzGerald

Resources Editor
Melbourne
Sarah-Jane Tasker

Reporter
Sydney
Iron ore break-even prices

THE iron ore price collapse is set to punch a $10 billion hole in the profits of leading iron ore producers Rio Tinto, BHP Billiton and Fortescue Metals over the next two years, taking Canberra tax ­receipts down in the process.

The profit crunch could be more severe if, as some watchers suspect, prices for the steelmaking raw material weaken further from its present level of $US83.20 a tonne — a price now down by 38 per cent on last (calendar) year’s average of $US135 a tonne.

The sharp retreat in prices since the start of the year has ­focused market attention on the small and higher-cost producers, whose viability is being challenged by the price slump.

But now attention is turning to the profit impact of the price fall on the big and low-cost producers, and what that means for the pace of capital returns in the case of Rio and BHP, and in the case of Andrew Forrest’s Fortescue, its ability to reduce its debt to levels that would allow a big increase in its dividend payments.

Macquarie has been one of the first of the big-name brokers to quantify the profit impact on the big three after slicing its iron ore price expectations by 5-20 per cent for the 2014-2019 period.

More immediately, it has cut its 2015 price expectation by 16 per cent to $US92 a tonne and its 2016 expectation by 18 per cent to $US90 a tonne. While both forecasts imply a price recovery, the lower price “deck’’ still has a dramatic impact on profit expectations for Rio, BHP and Fortescue.

Macquarie has slashed Rio’s 2015 profit expectation from $US10.5bn ($11.5bn) to $US9.1bn. For BHP the reduction is 9 per cent to $US12.4bn and for For­tescue — a single commodity company — the fall is a more dramatic 41 per cent to $US1.8bn.

The collective profit hit is $US3.93bn next year, rising to a $US4.76bn hit in 2016 ($9.5bn in all at today’s exchange rate). Macquarie noted that the new and lower forecasts meant its estimates were now well below market consensus, suggesting a catch-up elsewhere and likely pressure for more share price pain.

Meanwhile, Goldman Sachs, one of the original bears on the iron ore price, said yesterday that its predicted price decline had come sooner than expected.

Analyst Christian Lelong said the price fall had been dramatic, and that a weak demand outlook in China and the structural nature of the over-capacity meant a recovery was unlikely. “In our view, iron ore has already transitioned to an exploitation phase where the commodity prices are typically subject to the deflationary pressure of mining productivity and the depreciation of commodity currencies,” he said.

The investment bank maintains its $US80 a tonne forecast for 2015, with it falling to $US78 a tonne by 2017. That compares with peak prices of $US190 a tonne in 2011 and last (calendar) year’s average of $US135 a tonne.

The great hope of the iron producers, backed by most analysts who are tipping a December quarter rebound in prices to as much as $US100 a tonne, is that relief will come when China starts re-­stocking and when its high-cost domestic producers drop out of the market.

But Mr Lelong argued these safety valves would be tested given that stockyard space is finite and port restocking should play a more modest role from 2015 onwards. He warned that tier-two seaborne producers were increasingly vulnerable, with up to 40 million tonnes a year in seaborne capacity at risk of closure in both 2015 and 2016.

May Zhong, an analyst at Standard & Poor’s Ratings Services, said yesterday the ratings agency’s recent stress test on the sector found that if the iron ore price stagnates at about $US90 a tonne or less through 2015, some miners would face downward ratings pressure.

Major players, such as BHP, should have sufficient buffer to absorb lower iron ore prices, although they would have less flexibility at their current ratings to undertake debt-funded growth or capital-management initiatives, she said. “However, smaller miners that have substantial debt or expensive operations will wear the brunt of the impact.

“This may include companies such as (ASX-listed) Atlas Iron and (US-owned) Cliffs. The ultimate rating impact depends critically on a mining company’s financial flexibility, such as its ability to defer or delay capital ­expenditure and conserve cash.”

Iron ore price in fresh falls
DANIEL PALMER SEPTEMBER 11, 2014 5:30AM

The price of iron ore has sunk to new depths overnight, losing another 1.2 per cent to hit a fresh five-year low.

Benchmark iron ore for immediate delivery to the port of Tianjin in China is currently trading at $US82.20 a tonne, down sharply from its $US83.20 closing mark in the previous session.

The commodity has now lost 40 per cent on the year and has seen just one positive trading day in the past 17 amid concerns about rising supply from Rio Tinto, Vale, BHP Billiton and Fortescue Metals Group and weakening demand from key customer China.

The latest falls followed a revision to pricing estimates from Goldman Sachs, with analysts at the investment bank suggesting more pain could be in store.

“The price decline has been dramatic, but a weak demand outlook in China and the structural nature of the surplus make a recovery unlikely,” Goldman analysts Christian Lelong and Amber Cai wrote in a note titled ‘The End of the Iron Age’.

“Lower prices for iron ore and steel are unlikely to boost demand in a material way. Instead, the day when steel production in China will peak gets ever closer.”

Goldman, while retaining its forecast of $US80 a tonne for 2015, reduced its 2016 forecast to $US79, from $US82, and its 2017 outlook to $US78, from $US85.

The latest developments have seen Macquarie Bank analysts lower their profit forecasts for BHP, Rio and Fortescue, with the profit hit set to come close to $10 billion over the next two years, according to The Australian.

The one silver lining in the commodity’s retreat this week for local miners has been a similarly large fall in the value of the Australian dollar. The unit is now trading comfortably below US92c after holding above the US93c mark as the initial falls in the iron price were realised in recent weeks.

Inevitable big bust following an unprecedented boom past 10-20years. Aussie might trade dollar for dollar to sgd soon

As glut increases, even bhp and tinto might become unprofitable

via Xperia Z1 with Android 4.4.4 running tapatalk.

the boom is less than 10 years. If I am not wrong, in 2004, iron ore was as cheap as $20 per ton? Even just before 2007, it could be as low as $50.

http://www.indexmundi.com/commodities/?c...months=180

Yeah imagine what that would do to sg props that are developing down under, just a matter of time

via Xperia Z1 with Android 4.4.4 running tapatalk.

lucky country mate...

resources is not the end all... many people conveniently forgotten about the service industry and the positive impact of a growing population that not many countries are enjoying...

U guys just watch and Australia will time and again make skeptics swallow their words...

No Vested Interests
GG

(11-09-2014, 03:06 PM)BlueKelah Wrote: Yeah imagine what that would do to sg props that are developing down under, just a matter of time

via Xperia Z1 with Android 4.4.4 running tapatalk.

Pressure on but prices 'average'
Stephen Cauchi
481 words
12 Sep 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
Commodity prices may have come under pressure this year, but they are still 115 per cent above their 1990s average, with iron ore and oil up more than 500 per cent, a long-term analysis of commodity prices by HSBC shows.

But taking an even longer-term view back to the 19th century, commodity prices are about normal, HSBC found.

Sugar and meat prices are set to increase sharply, oil will go up, and metal will stay strong, analysts say.

The analysis, More Super Less Cycle, took a short-, medium- and long-term look at global commodity prices, with a near- and medium- term outlook.

In the short term, commodity prices fell by 18 per cent since the 2011 peak. In the medium term prices increased 115 per cent since the 1990s. But in the long term, commodity prices are just below the 1865 to 2010 average.

"Historical comparisons reveal that commodity prices are not exceptionally high right now, but rather, they were historically low in the 1980s and 1990s. Indeed, a long-run comparison suggests that commodity prices are ­currently around their 150-year average in inflation-adjusted terms."Supply now keeping up with demand growth

In the 1980s and 1990s, the report noted, global growth was dominated by Western economies and services sectors such as information technology and finance. The sectors are not commodity intensive.

But in the first decade of the 21st century developing economies – such as China and India – were the key drivers of global growth and their main needs were better infrastructure and housing – commodity-intensive sectors.

"Initially this ramp-up in commodity demand saw a sharp rise in commodity prices as strong demand was met only be weak supply," said the report. "Supply is now keeping up with growth in demand. But despite this growth in supply, commodity prices remain high as there are few commodities that have seen an excessive supply response."

Since the 1990s, iron ore, oil, gas, tin, fishmeal, lead, copper, wool, nickel and uranium had the strongest growth. Iron ore prices increased seven-fold and oil six-fold. Soft logs, olive oil, sugar, tea, lamb, sawn wood, cotton, hard logs and aluminium were cheaper.

Emerging economies will continue to fuel global growth and so commodity demand will remain strong, said HSBC.

"Commodity supply is unlikely to substantially exceed demand, supporting our view that commodity prices are likely to remain structurally high."

The "higher-grade" commodities such as zinc, nickel, aluminium, gas, meat, edible oils, dairy and sugar had the strongest potential for price growth. Sugar and meat prices will most likely go up. Soybean prices will go down.

For iron ore – for which Australia is the world's largest exporter – "the story is more complicated. Significant supply is coming online . . . [but] if the price falls further ­production is likely to be cut."


Fairfax Media Management Pty Limited

Document AFNR000020140911ea9c00046