Iron Ore Prices

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Iron ore sinks to new six-year low
DANIEL PALMER BUSINESS SPECTATOR MARCH 24, 2015 7:16AM

The price of iron ore has again moved below $US55 a tonne, hitting another six-year low as oversupply worries continue to haunt the market.

At the end of the latest offshore session, benchmark iron ore for immediate delivery to the port of Tianjin in China was trading at $US54.20 a tonne, down 1.5 per cent from the prior close of $US55.00 a tonne.

The price is the commodity’s weakest close since 2009 and extends its losses since the start of 2014 to 60 per cent. The recent falls have come despite a weakening US dollar, which has resulted in gains in most other commodities, including oil and copper.

At the heart of the price collapse over the past 15 months has been surging production amid a climate of softening demand growth. Analysts have been consistently revising their 2015 and 2016 forecasts lower over the past couple of weeks as the iron ore price fails to find a floor.

Several analysts are now tipping a rebound may have to wait until the last quarter of the year, with a floor price of about $US50 a tonne an increasingly common prediction.

While picking the bottom of a cycle is always fraught with danger, the bigger debate at the moment centres on the strategies of market heavyweights BHP Billiton, Vale and Rio Tinto, with Fortescue Metals Group echoing the recent criticism of WA premier Colin Barnett in labelling the tactics “completely flawed”.

“We’ve seen a massive amount of wealth transferred out of our industry and out of Australia for that matter,” Fortescue chief executive Nev Power said.

Last week, WA premier Colin Barnett derided the tactics of lifting production in an already oversupplied market as among the “dumbest corporate plays” he had seen.

The chief executive of US-based iron ore miner Cliffs, Lourenco Goncalves, went even further at the start of the month in saying the strategies amounted to “self-destruction” and warned prices could fall as far as $US30 a tonne if the tactics continued.

Both BHP and Rio launched a stern defence of their production plans earlier this month, arguing that their moves have been designed to maintain market share.

“If we don’t supply it, somebody else will,” Rio’s iron ore boss Andrew Harding said.

“The minute someone else supplies and I don’t, our shareholders miss out, our employees miss out, and if that supplier that chooses to fill that void is an international supplier, then the Australian and Western Australian people miss out because they don’t get the revenue-based royalties.”

The two local giants are still making strong margins at current price levels given production costs that have fallen to about $US20 a tonne or below.

Meanwhile, Fortescue’s Mr Power said his firm had also managed to trim expenses, with average costs of about $US44-$US45 a tonne.

The WA firm sells its product at about a 15 per cent discount to the spot price, meaning it would likely be making about $US2 a tonne at current prices.

Mr Power said the firm was hoping to cut a further $US5-$US6 from production costs in the near-term.

Business Spectator

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China’s former steel hub desperate as pollution forces cuts
THE AUSTRALIAN MARCH 28, 2015 12:00AM

Scott Murdoch

China Correspondent
Beijing
Slow grind for China’s steel towns

The streets of the former boom town of Tangshan are quiet as the region’s steel mills close. Picture: Dave Tacon Source: News Corp Australia

In Tangshan, the former steel hub of China just a few hours drive outside the capital Beijing, the once busy streets have turned quiet and a sense of despair and desperation is evident.

Dozens of men, once employed in the city’s numerous mills that pumped out as much steel as possible to help feed China’s unprecedented economic boom and fuelled the nation’s residential and commercial property market development, are now aimless on the streets.

China’s government has declared steel and iron production across the country will be reduced by 80 million tonnes within the next two years, a direct consequence of the authorities’ aim to implement more sustainable economic growth and help fix the worsening pollution crisis. It is ­estimated that about 60 million tonnes of the reduction will come from Hebei, where Tangshan, a prefecture-level city, is located.

The province, the heartland of steel production, has seven of the top 10 most polluted cities in China and residents are demanding action.

An Air Quality Index (AQI) reading yesterday showed pollution in Beijing was 130, more than four times the level that the World Health Organisation considers unhealthy.

Beijing residents awoke to messages on their smartphones warning them of the poor air quality and advising them not to spend long periods of time outside.

In Hebei, steel production last year dropped by 0.6 per cent but significantly it was the first decline in 14 years. The region produced 185 million tonnes of the nation’s total 823 million tonnes of steel.

Steel giant Baosteel yesterday reported its 2014 net profit was down by 0.45 per cent, to 5.79 billion yuan ($1.2bn), and warned of tough conditions in the year ahead for the Chinese industry.

“The steel sector remains extremely competitive in 2015 and so, demand and supply will slow in tandem,” the company said in a statement.

“The steel sector will still suffer from oversupply and it will be a new normal for companies’ operations to just eke out small profits.”

Several unprofitable steel ­factories have been forced to close in Hebei in the past year, and ­production cutbacks have been ­ordered at the larger state-owned organisations that are still ­working.

The slowdown has had direct consequences for Australia, which provides the bulk of China’s iron ore imports. The commodity’s price has now fallen to $US54.80 a tonne for delivery into Tianjin, close to its lowest level in six years.

China currently has a reported 100 million tonnes of iron ore inventories stored at its major ports after buyers took advantage of the recent low prices.

It has been estimated in Tangshan alone that about 100,000 workers either have lost their jobs or will lose them in the next few years and the production cutbacks will cost the region about 50 billion yuan in lost revenue.

The Hebei province last year declared an economic growth rate of 6.5 per cent, the third lowest in China and well below the national GDP of 7.4 per cent.

Workers who have been effected by the steel industry slowdown are clearly resentful. The Weekend Australian was hassled several times while in the town by former workers not keen for the area’s current woes to be publicised.

In the Fengnan district, Mr Liu lost his job last year at the Fufeng Steel Company and said prospects in the region were now gloomy.

“The company stopped producing steel last year and there were 1500 workers laid off,” he said.

“We are being paid just 600 yuan a month until October but after that I don’t know what will happen to us. The steel market has slumped and we were producing almost 1 million tonnes of steel per year, which is a large amount. The government should be subsidising a large company like us.”

Mr Wang, a guard at a deserted mill said the industry slowdown had had a clear impact on people’s lives.

“If production comes back then workers are going to be easy to find,” he said.

“During the boom time, people here had better lives. We were able to buy meat and fish here freely because people were earning money. But now a lot of us cannot ­afford fish. I hope things get better.”

Guofeng Steelworker Ma Gian­guo said thousands of workers were now concerned for the ­future, after the government warned that most of the production cuts would be made in Hebei.

China’s steel exports fell by 24 per cent last month, one of the worst performances in year, following a 1 per cent rise in January

“The company is clinging on but we are worried,” Mr Ma said.

“Several mills have stopped production already and the government is reducing steel output because of the air quality. We don’t know if our company is going to lay off workers like many others have recently. Almost everyone in this area, and the other businesses, are dependent on this company for their livelihood.

“It would be a disaster if stopped production.”

Fuhaixin steelworker Wang Kunqi said the falling price of steel plus the higher costs of intensified environmental regulations was making it tough for smaller mills in the area to survive.

“Our mill is not making a profit but we are also not making a loss, so it’s a fortunate situation,” he said.

“Many smaller mills have gone bankrupt. There are big costs involved in producing steel, so we are earning less than we were before. It’s a tough period.”

Guofeng Steel Company worker Wu Yaohui said thousands of workers’ livelihoods depended on steel production in the region.

“We know the company is losing money because the steel price is cheap and at the moment demand is weak,” he said.

“But the company is owned by the local government and thousands of workers depend on the company, so it’s very hard to bankrupt it.

“We still get paid every month.”

In Hebei, the negative consequences of the steel industry’s weak performance are starting to be felt outside the sector.

An amusement park in the Fengnan Economic Development Zone was being built, but work stopped suddenly two years ago when the province’s funding started to be affected by the steel slowdown.

The park eerily stands half built and caretakers Mrs Zhang and her husband Mr Niu have not been paid for a year.

The couple spend their day feeding chickens and watching television in a demountable hut on the edge of the park.

“The work stopped because the district government could not ­afford it,” Mr Niu said. “You can see the newly built shopping malls are all empty. The business of the steel mills here is bad, so the local government has no money.

“We have not been paid for about a year and we don’t know whether work will ever begin again.”

HSBC analyst Chris Chen said it was likely that Chinese steel demand would be sluggish this year as most economists had forecast growth of 7 per cent.

It is estimated that at the 7.4 per cent growth achieved last year, the nation’s steel consumption would have been down at least 3.4 per cent, year-on-year.

“We believe Chinese steel companies will continue to face a tough environment in 2015 with structural oversupply, weakening demand, tight credit conditions and intensifying price competition,” Ms Chen said.

“We see steel prices falling yet limited downside in raw material prices.

“The rising environmental costs brought about by new stricter standards should further squeeze margins.”

Additional reporting: Wang Yuanyuan

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Signs Chinese steel output declining
THE AUSTRALIAN MARCH 30, 2015 12:00AM

Matt Chambers

Resources Reporter
Melbourne
Fortescue Metals Group Mine Tour
A slowdown in Chinese steel output will put further pressure on iron ore miners. Source: Supplied

The unprecedented growth in Chinese steel production that ­underpinned Australia’s iron ore boom of the past decade could be over, with early signs this year’s production will fall for the first time in three decades.

This will put even more pressure on iron ore prices — which fell to a fresh seven-year low at the weekend — than just the tide of new mine supply Andrew “Twiggy” Forrest wants to hold back.

Iron ore prices compiled by The Steel Index fell US70c to $US54.08 on Friday night, bringing losses just this year to 24 per cent. Subdued Chinese steel demand has appeared at the same time as a flood of new supply from the boomtime-approved iron ore expansions of Mr Forrest’s Fortescue Metals Group, Rio Tinto and BHP Billiton.

Prices of the steelmaking ingredient are now down 60 per cent, from $US135, since the start of 2014. The potential steel drop, which has more and more analysts wondering if China’s huge steel industry has peaked, calls into question long-term Chinese steel forecasts that BHP and Rio continue to endorse.

China’s steel output has been surprisingly soft in the first two months of the year, and early indicators are that March will be even worse, meaning any hopes of a lift in demand are dimming.

A slowdown in Chinese steel output will make what is already an iron ore surplus more severe and has the potential to further drive down prices from present levels where Fortescue, the ­highest-cost major, is now struggling to cover costs (including debt repayments).

Fortescue’s troubles were evident last week when Mr Forrest called for Australian iron ore producers to join forces to cut production and drive prices higher, which has seen him come under investigation from Australia’s competition regulator.

Earlier this month, UBS cut a forecast for 2 per cent steel growth to one of a slight (0.5 per cent) fall.

“This implies the first decline in China’s steel production since the early 1980s and therefore a reduction in iron ore demand,” UBS analyst Glyn Lawcock said.

The bank now expects iron ore to average $US58.50 through 2015 and 2016, down from a previous forecast of $US65.50, a level the bank believes is needed to drive out higher-cost miners.

Beyond this year, the UBS steel production forecast is “flattish” because of a slowing property sector, growing global protectionism against Chinese steel and Chinese government environmental policy and capacity closures. “The key message is our global steel team expects very minimal steel production growth from the key centres for the seaborne trade, particularly China,” Mr Lawcock said. “This is a fundamentally ­different view to BHP Billiton, which maintains expectations for China’s steel production growth to peak at between 1 billion and 1.1 billion tonnes per annum in the mid-2020s and plateau through to 2030.”

UBS is forecasting Chinese crude steel output of 835 million tonnes this year, down from a record 839 million tonnes in 2014.

Last week, Macquarie analysts said China’s steel output in January and February was down about 1.5 per cent from the same period in 2014. “March figures look set to be even worse, with China Iron and Steel Association member mills’ 10-day data not having shown the usual post-New Year pick up,” Macquarie said.

The gloom is shared by Morgan Stanley, which said sharply lower commodities imports in January and February signalled dormant industrial demand.

“Imports (of iron ore) are likely to rebound only if broad-based ­investment demand in the key sectors, like construction and infrastructure, picks up as the country returns from the Lunar New Year holiday (which finished on March 1)”, Morgan Stanley said.

BHP this month restated its expectation Chinese steel production would plateau at between 1 billion and 1.1 billion tonnes in the middle of next decade. Rio is a little less ambitious but still talks of growth of 1 per cent a year, taking China to 1 billion tonnes of steel production towards 2030.

Many analysts are now sceptical of the optimism in the forecasts, but the producers continue to defend their predictions.

Last week, Rio chief Sam Walsh told a Melbourne lunch he had just flown in from China, where a talk from Premier Li ­Keqiang had given him confidence the government had struck the right course.

[BlueKelah]

Iron Ore May Extend Slump Below $50 as Miners’ Costs Decline

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Rinehart's nerves of steel
1659 words
14 Mar 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Iron lady Falling ore prices threaten Gina Rinehart's 23-year quest to become a miner, write Julie-anne Sprague and Tess Ingram.

wGina Rinehart was doing her best to avoid the press pack gathered in Perth this week.

Plunging iron ore prices was all anyone at an annual iron ore conference was talking about.

Rinehart could be forgiven for wanting to avoid the scrutiny. She's three- quarters of the way through building on her father's mining legacy - Hancock Prospecting's $US10 billion Roy Hill mine in the Pilbara.

But the halving of the iron ore price to a near six-year low of $US57 a tonne is threatening to spoil the party.

Australia's richest person usually shuns the media. Interviews are rare. Little wonder given her prospecting dad, Lang Hancock, thought journalists were either socialists or communists.

But this week was different. AFR Weekend spotted Rinehart at the back of an auditorium and asked her what impact the low price was having on the project. She came out swinging.

It isn't low iron ore prices that hurt her project, she says. It's government red tape.

"What affects the project is high costs," Rinehart says.

"They have to cut these government cost burdens because our costs are incredible."

To date, Roy Hill has had to get almost 5000 various approvals from various levels of government.

And Rinehart has been focused on production costs, not iron ore prices. Commodity price cycles are in her veins. She has long known while you can control costs, commodity prices can go up and down. But this downturn is particularly severe.

The iron ore price has slumped 20 per cent since January. BRW estimates the slump has shaved $5 billion, or $14 million a day, from her $20 billion fortune, derived largely from mining royalties.

And it's likely to continue falling. China & Iron Steel Association deputy Secretary-General Li Xinchuang told the Global Iron Ore & Steel Forecast conference in Perth that Chinese steel production has peaked and would fall to about 814 million tonnes this year.

It poured more cold water on long-held claims by BHP Billiton and Rio Tinto that production would reach 1.1 billion tonnes by 2025.

There are fears demand for Australian ore could fall 10 per cent, although Li argues ore from Western Australian mines will remain in demand by Chinese mills because of its high quality.

Even so, the outlook for prices is bearish. On Thursday Merrill Lynch slashed its 2015 iron ore price forecast by 21 per cent to $US55 a tonne and estimates it to stay there until inching back to $US60 a tonne in 2017. The falling Australian dollar is softening the blow but analysts doubt it will stop high cost mines from closing.

Resources executives, analysts and bankers say while Roy Hill is expected to become the third-lowest cost producer in the Pilbara behind BHP and Rio, there's little doubt that soft iron ore prices would be worrying Rinehart, her management team and the throng of financiers.

"It has to be under enormous stress," one senior resources industry source says.

Export credit agencies and 19 commercial banks stumped up $US7.2 billion ($9.35 billion) a year ago to fund the project. It was the biggest financing package of its kind in the world. Back then the iron ore price was $US110 per tonne.

Much of the early work was funded by $US3.2 billion tipped in from Rinehart's joint venture partners POSCO, Marubeni and China Steel Corporation, which collectively hold 30 per cent.

There's little doubt the mine will be completed. The question is; if prices continue to fall will it be profitable?

From Roy Hill's head office near the Perth Airport, Rinehart overlooks her army of workers from a boardroom featuring large white leather chairs and a long table featuring her favoured Kimberley sandstone.

One source said the boardroom has a glass wall that can be made transparent or opaque at the touch of a button, allowing Rinehart to mask her presence as she peers over her staff. Yet some of her quirks are used by critics to highlight weaknesses at Roy Hill.

Rinehart doesn't enter the building like the rest of her staff. She has her own private entrance.

At the construction site, she stays in a larger size donga, or portable mining accommodation in a special VIP area. A source says her donga has wood panels on the ceiling and sits at the top of the cluster looking back down on the camp.

It hardly engenders a team spirit when Rinehart is quarantined like royalty.

It leaves some drawing comparisons between another mining entrepreneur, Andrew "Twiggy" Forrest who created Fortescue Metals Group in 2003.

Forrest turns up to the site wearing the same Fortescue uniform as his staff, shakes hands and gets to know their names. He stays in the regular accommodation. He doesn't call his staff employees. They are his "team" and often his "Fortescue Family".

One source, who once worked with Rinehart, says while she is "incredibly intelligent", she doesn't always relate to the person on the street.

"She understands finance as well as anybody," the source says.

"She's ahead of the game when it comes to that. What she doesn't have is the smarts on the ground. How people work and how people are motivated. But you have to remember how she grew up. She never had a normal job. She doesn't know the difference between Monday and Saturday. It's work, work, work."

Early on Roy Hill was buffeted by financial challenges, battles with the government over port access at Port Hedland, and spats with rival miners over access to rail.

Then came the challenges and time involved procuring financing and, most recently, problems onsite with contractors and safety performance. In just nine months, there have been 36 safety incidents reported to the state's Department of Mines and Petroleum.

It forced the government to issue 10 prohibition notices, including a January notice that banned the use of cranes at the ore processing facility. It disrupted major work for six weeks and put the progress of the processing facility behind schedule.

AFR Weekend can reveal a prohibition notice was issued as recently as February 25 after issues involving a fork lift.

The safety events, which included a crane toppling over in front of a safety inspector, have sparked concerns about broader site safety with unions and contractors.

It has also caught the eye of its financiers.

"We obviously need to ensure that we provide back to the lenders progress [reports] and if they are not comfortable we need to provide them detailed plans of how we will fix it up," Roy Hill chief executive, Barry Fitzgerald, said in February. "With the safety we have to explain to them what we are doing, how we are rectifying it and how it will occur."

The project's head contractor, Samsung C&T, has been in disputes with its subcontractors, including one that interrupted the progress of the port development and resulted in the termination of Laing O'Rourke's subcontract.

The role has been filled but it remains unclear how progress was impacted.

A payment dispute between the two parties remains, as do talks between Samsung and another subcontractor NRW Holdings. Samsung has reached separate settlements with Thiess, the subcontractor at the centre of the crane safety issues, and McConnell Dowell and Central Systems.

Fitzgerald, who was the public face for Roy Hill at the Global Iron Ore & Steel Conference, says the number of contract disputes is "quite normal" as Samsung acts "as any normal contractor would" to protect itself from the commercial penalties it faces if it fails to deliver on its $5.6 billion contract.

The structure of Samsung's contract shifts much of the overrun risk on the Korean construction giant, rather than the project's sponsors.

Court documents released this month over the dispute between Samsung and Laing O'Rourke revealed Roy Hill stands to lose $77 million a month, "and rising" if the project is delayed, as well as the risk of losses from any sales contracts.

Fitzgerald remains confident the safety and contractor problems won't prevent Roy Hill's first ore from setting sail by the end of September 2015. The project, he says, is on time and on budget.

Sources says while the banks will be watching the project closely, any financial stress is unlikely to be felt by Rinehart until the project reaches its nameplate capacity of 55 million tonnes. This is expected by 2017. This is what is likely to underpin the banking covenants.

The weaker price will mean Rinehart is likely to be under water for the first year or two of production. Merrill Lynch forecasts Roy Hill's production costs will be $US45 a tonne based on 55 million tonnes a year.

Based on its assumption for iron ore to trade at $US55 a tonne, this means Roy Hill is making a $US10 a tonne margin, or $550 million in earnings each year. It's unclear what her interest charges are. One analyst who declined to be named put it at about $430 million a year.

"She's [Rinehart] just making money," the analyst says. "Only just."

There's a certain irony to Rinehart's rising and now falling fortunes. Much of her estimated wealth is from royalty cheques posted from Rio Tinto, which mines vast swathes of Hancock Prospecting tenements pegged by Rinehart's father Lang Hancock in the 1950s and 1960s. But it is Rio Tinto and fellow iron ore titan BHP Billiton that are being blamed for crushing the iron ore price by flooding the market with ore.

Could a strategy by her close business partner undermine her 23 year quest to develop Roy Hill?


Fairfax Media Management Pty Limited

Document AFNR000020150313eb3e0001o

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Iron ore slump to force mine closures

Tess Ingram, Julie-anne Sprague
929 words
7 Mar 2015
The Age
AGEE
English
© 2015 Copyright John Fairfax Holdings Limited. Factiva.Gateway.Messages.Archive.V1_0.ELink
Resources - Price crash

The plunging iron ore price could force high-cost mines in Western Australia to shut by July, according to senior mining executives and analysts.

The price of the key steel-making ingredient fell below $US60 a tonne overnight on Thursday to the lowest level since May 2009, when daily prices became the benchmark pricing system. It increases pressure on miners that have been dramatically cutting costs for the past six months.

Perth-based Patersons Securities' head of research, Rob Brierley, said the sustained price rout would trigger miners to scale back or mothball mines.

"We have been dealing with this iron ore price for the best part of six months, so it would be starting to hurt them," he said.

"The next stage would be starting to look at rationalising production and scaling it back. I would expect that to be the next phase: high-cost mines shuttering and lower-cost mines being worked harder."

He said this might happen by July.

"All of them are letting people go and doing everything from a cost perspective but, sooner or later, you squeeze that lemon until there is no juice left," Mr Brierley said.

"I don't see the iron ore price getting any better."

Traders are nervous demand for iron could soften after China set its lowest target for economic growth in 15 years.

Resources consultancy Wood Mackenzie warned Mineral Resources' Carina mine, 400 kilometres east of Perth, was one of three mines at risk of closing if the price remained about $US60 a tonne or lower.

Mineral Resources chairman Peter Wade said the company would re-evaluate Carina's operations.

"The board has a look at these things every meeting and, certainly, Carina has higher operating costs than Iron Valley, primarily because we don't own the associated infrastructure," he said.

The price fall coincided with iron ore juniors BC Iron, Mount Gibson Iron and Atlas Iron being removed from the S&P/ASX 200 index.

Perth-based Argonaut resources analyst Matthew Keane said most miners were struggling.

"The reality is most of the miners, other than BHP and Rio, are in a loss-making position," he said. "Fortescue Metals Group is operating on slim margin. They are right on the knife-edge at these prices."

Atlas could close its Abydos mine to preserve cash, he said.

"If the price fall is sustained and it falls towards $US50 per tonne, that should prompt people to shut mines."

Auditors for Atlas warned last month the junior miner might have to sell assets or raise funds to repay debt if it fails to meet its cash-flow forecasts. KPMG said those forecasts were "highly dependent" on assumptions for the iron ore price, the Australian exchange rate and operating and capital costs.

"Should these key assumptions which underpin the cash-flow forecasts not be achieved, the group may be required to source additional funds through debt or equity markets or a sell-down of assets," KPMG said.

Atlas Iron managing director Ken Brinsden could not be reached for comment.

Argonaut chairman Charles Fear said the commodities downturn was the worst in more than 20 years.

"This is the deepest [downturn] I have seen since 1993," Mr Fear said. "Thermal coal took three years to halve [in price], iron ore took less than a year and oil has taken three months. Base metals are under enormous pressure."

The depreciation of the Australian dollar since December has cushioned the blow for the West Australian government and has helped relieve some of the pressure for many miners.

The West Australian government slashed its iron ore forecast for 2014-15 from $US122.7 a tonne to $US75 a tonne in December.

The iron ore price has averaged $US66.41 a tonne since December 3, when the government ruled off its books for its mid-year forecasts. The price fall has cut $481 million from expected iron ore royalty revenue. However, the softening dollar will boost the books by $426 million, meaning the net impact of the lower iron ore price is $55 million.

But the government is shouldering the burden by returning a chunk of royalty payments to junior miners when prices trade below $90 a tonne.

Eligible small miners are able to have half of their royalties reimbursed to them but must repay the state government by December 2017.

One analyst who declined to be named said junior miners were operating on tenuous life support.

"The danger in the Australian market is that you have a falling dollar meaning that the mid-tiers here are under the impression things will get better for them so they hang in there but for a correction in the price, which is good for the industry, we need them out," he said.

Rio Tinto is cutting about 800 employees and contractors as it hammers down costs.

A spokesman for Rio said the miner had been cutting costs for a number of years "in the knowledge of an expected decline in iron ore prices".

"We must continue to take actions that ensure our business remains competitive," the spokesman said.

"We have been identifying opportunities to simplify and streamline our organisation. Where possible, we are moving those affected into existing vacancies or other parts of our business. Unfortunately, in some circumstances there will be people leaving our business.

"We are working closely with our employees through this process. We will provide support and assistance to those who are impacted."


Fairfax Media Management Pty Limited

Document AGEE000020150306eb370003e

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Iron Ore prices at US$47/ton today

[BlueKelah]

Falling iron ore price means BHP Billiton, Rio Tinto might clear only $US1 a tonne

[greengiraffe]

China steel output may fall 25pc
ExclusiveAngus Grigg, Jennifer Hewett, Phillip Coorey and Amanda Saunders
1152 words
7 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Garnaut calls production peak Ex-BHP CEO Gilbertson slams iron ore strategy Huge tax hit

Chinese steel production has peaked and will fall by more than 25 per cent over the next decade and a half, according to prominent economist Ross Garnaut, a drop that would undermine Australia's entire iron ore industry, cost billions in tax revenue and reduce the living standards of most Australians.

As iron ore fell to a decade low of $US47 a tonne over the Easter weekend, former BHP Billiton chief executive Brian Gilbertson criticised the world's biggest mining group and Rio Tinto for flooding the market with iron ore, a strategy that he said would cost their shareholders over the long term and the country tens of billions of dollars of lost value for no benefit.

"When you see a price collapse of this magnitude, it's clear there is a major imbalance between supply and demand in the immediate future," he told The Australian Financial Review.

"The majors can't do much about demand, so the proper response should be to consider cutting back on supply. Instead, they seem to have a last-man standing approach where they remain committed to expanding and driving others out of the market. But the relevant question for shareholders should be whether it is in their interests to be left with such a bruised and battered boxer."

The price of the steel-making commodity is down 63 per cent since the start of last year, threatening the profitability of Fortescue Metals Group, Australia's third biggest iron ore miner, and undermining the federal budget. BHP and Rio Tinto, the biggest producers, have refused to back away from production increases that have contributed to the lower price.

Professor Garnaut, a former economic adviser to prime minister Bob Hawke and ambassador to China who correctly predicted China's declining appetite for coal more than three years ago when others were forecasting continued strong demand, said he agreed with private Chinese estimates that steel production will fall to around 600 million tonnes by 2030, when BHP and Rio Tinto estimate it will be 1 billion tonnes.

"There will be new urban apartments, railway systems and airports to build - but less each year," he writes in Tuesday's The Australian Financial Review. "My old friends say that Chinese production should fall from a bit above 800 million tonnes today to about 600 million tonnes in 2030."

Professor Garnaut's view puts him at odds with Rio Tinto, BHP and the official government forecaster, the Department of Industry, which predicted a production rebound to about 930 million tonnes in five years.

But it places him at the centre of an emerging consensus in China, which believes the country's steel production has peaked.

After his most recent trip to China, where he served as Australia's ambassador in the mid-1980s, Professor Garnaut decided to outline his concerns for Australian iron ore exports. If he is correct, China's steel production peaked last year at 823 million tonnes and will fall by 27 per cent to 600 million tonnes by 2030.

Deloitte Access Economics partner Chris Richardson said he backed Professor Garnaut, who remained well-connected in China, and said the implications for Australia were significant given its dependency on China.

"We have wrong-footed the Australian economy: we bet the house," he said.

Mr Richardson said for every dollar the iron ore price fell below forecasts, national income fell by abut $800 million and tax revenues declined by between $250 million and $300 million annually. The federal government's plans to return the budget to surplus within a decade look increasingly bleak.

Last year, between the May budget and the December update, the forecast average iron ore price was downgraded to $US60, resulting in a revenue write-down of more than $9 billion in two years. Now, it is to be downgraded again in next month's budget.

Rio Tinto and BHP have poured billions into new production capacity based on their forecast, even as China's economy slows and is driven more by consumer spending rather than housing and infrastructure investment.

Professor Garnaut said the iron ore price would continue falling until one of the big four miners - Rio, BHP, Vale of Brazil or Fortescue - cut production.

Cuts in China's domestic iron ore production will not be sufficient, he said. "The price trend is down until enough of the old or new supply capacity has been destroyed to balance the decline in demand."

This is a different narrative from that sketched out by the big miners. They have consistently argued that the price is being driven lower by greater supply, not a significant weakening in demand across China.

BHP and Rio, as the most efficient producers, believe they will force higher cost miners to shut down, eventually bringing the market back into balance and pushing prices higher.

Rio chief executive Sam Walsh said in February about 80 million tonnes of high cost iron ore would almost certainly be cut this year, and an additional 85 million tonnes was at risk. He estimated about 125 million tonnes dropped out of the global market last year, about 70 per cent of this from China's high-cost producers.

Professor Garnaut acknowledges this "tsunami of new supply" from the majors has contributed to the price fall, but also points to falling demand.

He cites the key steel-making province of Hebei as an example.

"Hebei, the province surrounding Beijing, was producing about 280 million tonnes of steel per annum at its peak.

That will be reduced to 200 million tonnes by 2020 - and most of the fall by 2017," he said.

The rapid decline in the iron ore price this year has caught most industry players and observers off guard. It follows a horror 2014, which saw the price shed half its value to about $US68 a tonne.

Iron ore has since lost another 30 per cent of its value, to be trading at $US48 a tonne on Monday.

At current prices, Fortescue may be losing money, while Vale's margins are thin.

BHP and Rio - the lowest-cost exporters of iron ore in the world - are still marking solid profits and the falling iron ore price is unlikely to dent their controversial expansion strategies.

For that to happen iron ore would need to fall to around $US30 a tonne.

Investors in BHP and Rio have told the Financial Review they will continue supporting the expansion strategies for as long as it is profitable.

But the rapid price fall is threatening Australia's other iron ore miners - including Fortescue and Pilbara juniors like Atlas Iron, Mount Gibson Iron and BC Iron.

They will need to review production if prices stay at current levels for a sustained period.


Fairfax Media Management Pty Limited

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Rio vows no mercy in iron ore supply increase
THE AUSTRALIAN APRIL 16, 2015 9:32PM

Matt Chambers

Resources Reporter
Melbourne

Rio Tinto remains unapologetic about continued iron ore expansions that are forcing down prices, declaring that the company is in a strong position as higher-cost, late entrants are in distress and that Chinese steel production will continue to increase, despite the growing market view it has peaked.

At the dual-listed miner’s annual general meeting in London overnight, chairman Jan du Plessis used the pain many iron ore miners are feeling after prices crashed from $US135 a tonne at the start of last year to around $US50 to underline his company’s resilience.

“At a time of significant distress for late-entrant and high-cost producers, Rio Tinto is in a position of strength,” Mr du Plessis said. “In times of increased market volatility, investors seek strength, reliability and consistency and in such times, Rio Tinto thrives.”

The iron ore giants Rio, BHP Billiton and Vale are continuing with or studying low-cost expansions that will flood the market and are expected to drive down prices until unprofitable higher-cost supply is driven out.

Chief executive Sam Walsh said the state of the industry, which Fortescue chief executive Nev Power yesterday described as a disaster that has “ripped the heart out” of industry and communities, was one of transition where high-cost supply would be replaced by low-cost.

“We have already seen the winding back of iron ore supply from Chinese producers, on top of production cuts from high-cost seaborne suppliers,” Mr Walsh said.

“Major industry shifts of this nature never take place in a smooth and uniform manner, so we can expect continued bumps, before the market settles at a new equilibrium.”

The bumps in the market so far have included Atlas Iron last week suspending all its production and Arrium mothballing its Peculiar Knob mine in South Australia last month. Fortescue, which has been struggling to break even but is predicting lower production costs next year, has been responsible for more boomtime supply than anyone. But Fortescue is now calling on production restraint from the other miners to support prices.

The statements from Mr Walsh and Mr du Plessis show Rio has no intention to comply and will push to maximise exports from its 360 million tonnes of ­annual rail and port capacity, of which about 40 million tonnes is now spare.

“This year in the Pilbara, we will undertake low-capital-cost brownfield expansions as we grow our capacity,” Mr Walsh told the annual general meeting.

“This will be achieved at a capital intensity of approximately $US9 a tonne, continuing to ­confirm our competitive position as the world’s lowest-cost supplier of seaborne iron ore.”

Goldman Sachs yesterday said the continued expansions, combined with lacklustre demand, meant iron ore prices would ­continue to head towards $US40 and would not rebound, meaning long-term price expectations of $US45 a tonne.

But while more and more analysts are predicting Chinese steel production peaked last year at 839 million tonnes, and are working this into reduced iron ore forecasts, Rio continues to see growth.

“Our Pilbara expansion represents a clear and consistent ­strategic response to the unprecedented long-term growth in China,” Mr Walsh said.

“It should be remembered that growth of just 1 per cent per year is required for China to reach one billion tonnes of crude steel production by 2030.” Mr du Plessis said commodities markets remained uncertain.

“It is clear that in the short-term we will continue to face challenging commodity markets as economic and geopolitical uncertainty continues,” he said. “Divergent monetary policy paths in Europe, the US and parts of Asia are contributing to the uncertainty. China is now experiencing slower, but still significant, economic growth as it rebalances its economic priorities from investment towards consumption.”

But he said long-term drivers of the industry remained intact, including about 70 million people entering the middle class each year and 170 million rural Chinese expected to move to cities in the next decade.

Rio’s Australian shares yesterday closed up 4c to $55.87.