Iron Ore Prices

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#31
Seaborne supply weighs down iron ore, until 2015
Commodities Peter Ker
506 words
15 Aug 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.
The benchmark iron ore price may have fallen to a 55-day low, but most ­signals suggest the price will rebound over the coming months.

Australia's most lucrative export commodity was fetching $US93.20 a tonne on Thursday, having fallen on each of the past four trading days.

Iron ore prices have been weighed down in 2014 by a huge increase in ­seaborne supply, but the past week's price weakness was also thought to be affected by weak lending statistics in China. Bloomberg reported that China's broadest measure of new credit was significantly weaker than expected and weaker than previous periods.

China is the biggest buyer of seaborne iron ore, and there are fears the weak credit statistics will flow through to iron ore price weakness.

Iron ore futures measured by the Dalian Commodity Exchange fell to their lowest level since June 20, but in a positive sign for iron ore producers, the futures were predicting an iron ore price for January delivery that was equivalent to $US106.25 a tonne at ­current exchange rates.

That figure is about 14 per cent higher than the current iron ore price, and UBS commodities analyst Daniel Morgan said he also expects the price to rise: "I think prices should see ­stability in the months ahead, with some modest upside. The surge in ­supply out of Australia in early 2014 looks largely complete, with flows set to now hold in [the second half of] 2014."

UBS expected the iron ore price to average about $US100 a tonne in the second half of 2014 to deliver a full-year average price of $US106 a tonne.Double whammy

The bank expects the benchmark iron ore price to average $US103 a tonne during the 2015 calendar year.

The benchmark iron ore price has declined by 31 per cent since January 1, and for Australian producers those declines have been compounded by a 4.5 per cent rise in the local currency over the same period.

That combination has meant a ­double whammy where local miners have had falling revenues on export units but, all things being equal, a rising cost base. Many miners have sought to offset the situation with continued cost cutting.

Mr Morgan said lower iron ore prices would gradually push high-cost Chinese producers out of business, and he said producers in Iran, Malaysia, Peru, Mexico and Chile would also likely be forced to stop exporting at the lower prices.

Virtually unknown in the iron ore sector, small producers in those countries have increased their exports in recent years and were collectively responsible for 208 million tonnes of the 1.2 billion tonnes of seaborne iron ore in 2013.

"In aggregate, these countries have grown faster than the traditional ­suppliers over the past five years, but likely carry a higher break-even cost base," Mr Morgan said .

The higher cost base is likely to see some of that supply evaporate as prices fall.


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#32
Hopes rise for iron ore price rebound
THE AUSTRALIAN AUGUST 18, 2014 12:00AM
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Barry Fitzgerald

Resources Editor
Sydney
Iron ore price chart
Iron ore price chart Source: TheAustralian
A MODEST recovery in iron ore prices has raised hopes that prices for Australia’s biggest export earner can rebound to $US100 per tonne before the end of the year, easing the pressure on higher cost producers for radical cost-cutting and project deferments.

Iron ore prices closed last week at $US93.40 a tonne, according to the Steel Index. While down from $US95.30 a tonne at the start of the week, the closing price was off the midweek bottom.

Prices have slumped in a dramatic fashion since the start of the year, plunging by 31 per cent from the early January price of $US135 a tonne, which was also the average for (calendar) 2013.

The average price so far this year is $US108.40 a tonne. Should it become the average for the full year, the local industry would take an $US18 billion revenue hit.

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But much of the impact on earnings is being offset by increased production, at least where profitable production is involved. That was reflected in the June half results of the lowest cost producer, Rio Tinto, which reported a 10 per cent rise in net profit from iron ore to $US4.68bn despite a $US974m revenue hit from lower prices across its increased production.

Citi analyst Ivan Szpakowski has correctly forecast iron ore price moves in the past and on Friday reaffirmed his prediction that prices will rise to $US100 a tonne for the fourth (December) quarter. He expects increased supply from exporters to level off after surging in the June quarter, and for higher cost domestic Chinese production to close in a sub-$US100-a-tonne environment. The forecast is also built on an expectation that Chinese steel production will strengthen over the last four months of the year. Rio forecast that Chinese steel production — at 830 million tonnes a year — would grow by between 3 and 4 per cent in 2014.

“Approximately 125 million tonnes of high-cost iron ore supply is expected to exit the market in 2014, as lower-grade producers from China and less traditional supply countries curtail production. This is expected to offset the impact of new supply to seaborne markets during 2014 from Australian and Brazilian producers,’’ Rio said.

Rio chief executive Sam Walsh said there were signs of iron ore stabilising at around $US95 a tonne. “If you look at the forward curves for iron ore, the prices are holding at around that level through 2017,’’ Mr Walsh said.

It has been a feature of the slump in iron ore prices that producers of lower quality ores have had to offer discounts beyond that implied by the lower iron content of their ores to secure sales.

Mr Walsh said that was starting to hit a number of juniors. “We have seen 85 million tonnes of capacity already come off around the world year to date; we are expecting through 2014 that 125 million tonnes will come off.’’

“Prices will be what they will be, but personally I’m not expecting any major dislocation to the iron ore prices,’’ Mr Walsh said.
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#33
Iron ore drops below $US92
AUGUST 22, 2014 8:15AM

Mitchell Neems

Business Spectator Reporter
Melbourne
The iron ore price has slumped to its lowest level in more than two months and dropped below the $US92 threshold as investors fret about the strength of the Chinese economy.

Benchmark iron ore for immediate delivery to the port of Tianjin in China is currently trading at $US91.90 a tonne, down from its $US92.30 in the previous session.

At the current price point, iron ore is at its lowest level since June 18, when it traded at $US90.30.

Earlier in June, the iron ore price dropped to as low as $US89 a tonne, but despite a minor rebound since then year-to-date falls are still over 30 per cent.

Yesterday, the HSBC flash China manufacturing purchasing managers' index was at 50.3 in August, down from 51.7 in July, a three-month low.

HSBC chief China economist Hongbin Qu said the data suggests the country's economic recovery is still continuing but its momentum has slowed again.

"Therefore, industrial demand and investment activity growth will likely stay on a relatively subdued path," he said.
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#34
BHP Billiton set to expand Pilbara iron ore operations
THE AUSTRALIAN AUGUST 25, 2014 12:00AM

Matt Chambers

Resources Reporter
Melbourne

BHP Billiton chief executive ­Andrew Mackenzie says iron ore prices are unlikely to climb back above $US100 a tonne but the company is readying to spend an extra $US3.25 billion ($3.5bn) to bring more ore on to the market in a bigger-than-expected expansion of its West Australian mines.

As iron ore prices last week slid to about $US90 a tonne and approached five-year lows, Mr Mackenzie said he was not counting on a price floor forming.

At the same time, in a declaration largely lost amid BHP’s plans for a $US14bn spin-out of non-core assets, the world’s biggest miner says it is looking to expand its Pilbara iron ore mines and ports to annual capacity of 290 million tonnes a year.

This is up from a previous target to grow to 270 million tonnes and at a forecast capital cost that is dramatically lower than guidance given to analysts a year ago.

“We would say it is quite unlikely that we would see prices north of $US100 a tonne, so our forecasts are obviously based on something below that,” Mr Mackenzie told British media when asked if there might be a price floor around current price levels.

Despite the downbeat outlook for a commodity that averaged $US135 a tonne last year, BHP looks more likely to go ahead with its planned expansion, which will be on top of plans to boost output to 225 million tonnes a year. This, combined with the company’s low operating costs of about $US40 a tonne, means ­prices would have to fall lower than anyone was predicting for the expansion to not look attractive.

On Friday night, iron ore ­prices slipped $US1.80 to $90.10 a tonne as Chinese steel mills continued to run down iron ore inventory amid low steel prices, uncertain demand and expanded production from BHP, Rio Tinto and Fortescue Metals Group.

The iron ore price, which has shed $US45 a tonne this year, is only at a two-month low. But if it fell another $US1.20, it would be at a two-year low, and if it dropped below $US86.70, it would be at its lowest since 2009.

Macquarie analysts said steel orders were softer in August and inventories remained higher than two months ago, meaning that more run-downs and continued lack of buying were possible.

“Mills do report that they plan to increase purchasing activity of both iron ore and coking coal, although whether this happens or not will almost certainly depend on how demand conditions evolve in the coming weeks,” the bank said in a note to clients.

BHP says work on debottlenecking meant it could build the 65 million-tonne-a-year expansion for less than $US50 a tonne of annual capacity. This is at a cost of less than half the guidance of $US100-$US120 an annual tonne that BHP gave analysts at briefings last year.

“We have looked at quite big capital costs and so on, but by just sitting back with what we’ve got and making what we’ve got much more productive, we’ve seen our way through to achieving that with minimal capital,” Mr Mackenzie told Business Spectator.

The looming $US3.25bn expenditure, which BHP will give more detail on in a November investor tour of the Pilbara, would give the company an extra $US5.85bn of annual revenue, meaning capital costs could be quickly paid back given the iron ore unit’s high margins.

BHP last week said a 6 per cent fall in the iron ore price cut $US864 million from earnings before interest and tax, but this was countered by a $US1.8bn EBIT gain from adding 40 million tonnes of ore for total production of 203 million tonnes. Production is expected to rise to 225 million tonnes this year. The debottlenecking the expansion would involve would be mainly at the port and from piggybacking off investments from previous expansions.
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#35
Iron ore price slips nearer to $US90 a tonne threshold
BUSINESS SPECTATOR AUGUST 25, 2014 12:12PM

Mitchell Neems

Business Spectator Reporter
Melbourne

THE iron ore price has dropped to a fresh two-month low and is now flirting with the possibility of slipping back under the $US90 a tonne threshold.

Benchmark iron ore for immediate delivery to the port of Tianjin in China is currently trading at $US90.10 a tonne, a sharp fall $US91.90 in the previous session.

At the current price point, iron ore is at its lowest level since June 19, when it traded at $US89.30.

Earlier in June, the iron ore price dropped to as low as $US89 a tonne, but despite a minor rebound since then year-to-date falls are still over 30 per cent.

The latest fall comes as BHP chief executive Andrew Mackenzie said iron ore prices are unlikely to climb back above $US100 a tonne
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#36
Iron ore price slumps below $US90
DANIEL PALMER AUGUST 26, 2014 7:30AM

The iron ore price has continued its retreat overnight, falling to a fresh two-month low on persistent worries that growing supplies will not be met with rising demand.

Benchmark iron ore for immediate delivery to the port of Tianjin in China is currently trading at $US89.20 a tonne, down almost 1 per cent from its $US90.10 closing mark in the previous session.

Such levels were last seen in mid-June when fears about the strength of the Chinese economy were on the rise.

The latest fall followed a near 2 per cent descent in the previous session, with investors eyeing news that BHP Billiton would increase its iron ore supply by a greater amount than previously expected.

The mining giant’s boss, Andrew Mackenzie, also cautioned investors not to expect the price of the commodity to rise significantly anytime soon.

“We would say it is quite unlikely that we would see prices north of $US100 a tonne, so our forecasts are obviously based on something below that,” Mr Mackenzie said.

Current year-to-date falls for iron ore are over 30 per cent.
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#37
China’s iron ore miners in do-or-die battle
THE AUSTRALIAN AUGUST 27, 2014 12:00AM

Rowan Callick

Asia Pacific Editor
Melbourne

Chna’s iron ore production Source: TheAustralian
A STRUGGLE to the death is under way “between the trium­virate of global iron ore miners with their big low-cost mines and China’s beleaguered high-cost producers”.

A leading Australian expert on China’s mining ­industry, Michael Komesaroff, writes in new analysis for China-based GavekalDragonomics that excess capacity among China’s iron ore producers will continue to play a prominent role in keeping market prices ­depressed.

The price problem is not a collapse in demand, he says: “Despite an unexpectedly weak property market, steel demand is still up nearly 5 per cent year on year.” ­Albeit below the 9 per cent in the corresponding period last year.

And demand for imported ore is growing by about 15 per cent — faster than in 2013 — thanks to the declining quality of domestic ore.

He says big foreign producers — Rio Tinto, BHP-Billiton and Brazil’s Vale — “have kept supply growth at full tilt even as demand decelerates. As long as this state of affairs continues, the ore price will stay below the level dictated by cost-curve fundamentals: probably in the $US95-$US100 per tonne range.”

But when enough Chinese miners are finally driven out of business — probably within two years, Mr Komesaroff believes — the ore price should recover to about $US110.

In previous cycles, he says, when the iron ore price fell below production costs it triggered at least a temporary shutdown of some of China’s high-cost domestic mines. The withdrawal of that supply allowed the price to ­recover, and some Chinese mines would reopen.

However, “this familiar pattern has not repeated in 2014”. Many large mines whose costs were well above current prices continued to operate.

He explains that “Chinese mine owners know that if they shut down it will not just be for a few months, but forever”.

“ Their costs are too high, their quality is too low and falling, and sources of financial support from local governments are drying up as China’s economy slows,” Mr Komesaroff writes.

The ability of the big Australian and Brazilian miners to flood the market with low-cost, high-quality ore was also now too strong. Thus “with their backs against the wall, China’s miners are looking for any way possible to keep operating for just a while longer”.

And the big global miners have responded to falling prices not by cutting supply but ramping it up — Australian output is now 150 million tonnes a year higher than in 2011.

Mr Komesaroff says they “hope that by flooding the market and driving down the price they can drive China’s pesky producers out of business. This will enable them to capture bigger profits”.

The average iron content of Chinese-mined ore has fallen from its 2003 peak of 50 per cent to 22 per cent today, requiring upgrading before being used to make steel — a process that consumes huge amounts of water.

And in the next two years, Mr Komesaroff adds, Australian production will grow a further 110 million tonnes a year, and ­expansion in Brazil is set to add another 90 million from 2017.
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#38
China policy could spell hard times for Australian iron ore producers

THE AUSTRALIAN AUGUST 29, 2014 5:27PM

Andrew Main

Wealth Editor
Sydney
Bad news ahead for iron ore producers

AUSTRALIA’S major iron ore producers have been able to play down the effects of the sagging iron ore price by lifting output but they may well run into problems ahead, says fund manager John Abernethy.

He says that BHP and Rio have been able to massage currency and output effectively but they’re also keeping prices low in a clear bid to force Chinas’s higher cost domestic iron ore producers out.

The problem, he says, is that China may choose to support those producers for strategic reasons even if it’s not economic to do so, thus creating an oversupply and pushing the ore price further down from its current sub-$US90 a tonne level.
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#39
Wall of supply keeping ore price rise at bay
THE AUSTRALIAN AUGUST 30, 2014 12:00AM

Barry FitzGerald

Resources Editor
Melbourne
Bad news ahead for iron ore producers

PM's Rio TintoA sustained fall in the iron ore price will smash earnings of the big three producers, Rio Tinto, BHP Billiton and Fortescue Metals. Picture: Gary Ramage Source: News Corp Australia
Bad news ahead for iron ore producersPM's Rio Tinto
AUGUST has been the month of capitulation for iron ore.

The price of the steelmaking raw ­material has continued its steady slide from last year’s (calendar) average of $US135 a tonne to near five-year lows this week of less than $US88 a tonne.

The one-third fall in the last of the commodities to be enjoying boomtime prices has had a telling impact on the market values of the iron ore miners, which have seen their collective value plunge as much as $20 billion this month.

Rio Tinto has fallen 5.8 per cent in the month, BHP Billiton by 6.1 per cent, and the “pure’’ iron ore company of Andrew Forrest, Fortescue, has shed 15 per cent of its value.

The already beaten up junior component of the industry has not been spared, with Atlas off by 12 per cent in the month and Mount Gibson down 6.4 per cent.

The plunge in the iron ore price means that earnings from the big three producers — Rio, BHP and Fortescue — will be smashed if the lower levels are sustained. The juniors have a ­bigger fear, and that is one around viability should iron ore move lower still from the $US87.30 a tonne quoted by The Steel Index on Thursday night.

Futures trading in China yesterday afternoon suggested the price rout was easing. But investor nerves are shot after eight straight days of price falls, even if the ­almost daily commentary from the producers and big-name analysts is that prices are set to ­recover to $US90-$US110 a tonne before the end of the year.

Richard Morrow, a veteran watcher of the interplay between equity values and commodity price moves, summed up the view of the equity markets yesterday on the slump in iron ore prices.

“Iron ore is looking like a war zone,’’ Mr Morrow, a director at stockbroker Baillieu Holst, said in his morning note to clients. ­“Chinese Steel mills are rubbing their hands together at the ­prospect of the boot moving from one foot to the other.

“As the heavyweights of the global seaborne iron ore trade slug it out for market share, the price is tumbling and profit margins are crumbling.

“What we are seeing is the ­brutal reality of highly cyclical markets. Underlying demand from China and the rest of the world will kick in a few months, but the rest of the sector will suffer pain for the short to medium term. The good thing about cycles is that they are constantly turning, so a buying opportunity will present itself in a few weeks’ time.

“Meanwhile, it’s not too late for traders to boot out a few BHP or Rio,’’ the veteran said. Investor nerves around iron ore’s next move were further jangled earlier in the week when an iron ore expansion plan by BHP — overlooked in the group’s demerger and profit announcements the week before — got reported in The Australian.

BHP, the No 2 producer to Rio with a near-term expansion target of 225 million tonnes annually (100 per cent basis), said it was looking to expand its Pilbara iron ore mines and ports further to 290 million tonnes a year. That is up from a previous target to grow to 270 million tonnes.

Given investors know all too well that it has been expansions by Rio, BHP, Fortescue, and to a lesser extent Vale in Brazil, that have caused an oversupply situation in the seaborne market, it was not what the broader market wanted to hear.

Good for BHP because the low cost of the expansion means it will be highly profitable, even at ­current prices. But not good for producers higher up the cost curve, and the broader iron ore market in general from a pricing perspective.

Perhaps even more alarming was the frank statement from BHP chief executive Andrew Mackenzie on the price outlook.

“We would say it is quite ­unlikely that we would see prices north of $US100 a tonne, so our forecasts are obviously based on something below that,” Mr Mackenzie told British media when asked if there might be a price floor around current price levels.

ANZ’s commodities desk says that there are three supply side dynamics holding back a price recovery — Chinese stockpiles, export supply expansion, and inelastic Chinese supply, the latter being the notion that high-cost Chinese production gives way to cheaper imports.

It is more bullish that BHP in believing prices are likely to recover “close” to $US100 a tonne toward the end of the year as “peak supply’’ eases.

“While supply issues will remain relevant going forward, the worst is likely passing, potentially triggering a small relief rally back up towards $US100/tonne by the end of the year,’’ the bank said.

From that, and Mr Mackenzie’s comments, it can be said that the wall of additional iron ore supply coming from the Pilbara means that no one expects prices to get back to the amazing $US191 a tonne seen in February 2011, let alone last year’s annual average of $US135 a tonne.
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#40
For long-term value investors, a good time to buy commodities (or maybe their stocks?) is at the bottom of the cycle, when the market price is lower than their production costs. Since commodities have a long cycle, I expect it could take many years, maybe more than a decade.

These articles give the breakeven iron-ore cost production cost (incl. shipping to China): Rio U$46, BHP U$53, Vale U$68.

http://www.intelligentinvestor.com.au/20...-iron-ore/
http://www.intelligentinvestor.com.au/20...re-cartel/

Interesting that the iron ore business is an oligopoly, despite it being abundant.

----
I wait until there is money lying in the corner, and all I have to do is go over there and pick it up.
Jim Rogers
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