Homepage
PR Newswire
07-09-2014, 10:57 PM
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.
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.
