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Wednesday 17 September 2014
Iron ore miners battle for survival as ‘perfect storm’ hits
High-cost Australian miners are battling for survival as plunging iron ore prices push many to breaking point, with analysts seeing no significant short-term recovery as Chinese demand for steel wanes in line with sliding property prices.
Iron ore miners battle for survival as ‘perfect storm’ hits
High-cost Australian miners are battling for survival as plunging iron ore prices push many to breaking point, with analysts seeing no significant short-term recovery as Chinese demand for steel wanes in line with sliding property prices.
AFP 17 September 2014
High-cost Australian miners are battling for survival as plunging iron ore prices push many to breaking point, with analysts seeing no significant short-term recovery as Chinese demand for steel wanes in line with sliding property prices.
Australia, the world’s largest exporter of iron ore, is heavily dependent on China’s hunger for resources even as its economy transitions away from an unprecedented mining investment boom.
A year ago, iron ore fetched about US$135 a tonne. This month it hit a five-year low of US$81.90, slumping 40 per cent since January. The weaker price has also hit Australian government coffers, reducing tax revenue just as it makes a push to bring the budget back into surplus.
Australia produces 17 per cent of the global iron ore, second only to China’s output of 39 per cent. “I think the iron ore market’s got a perfect storm at the moment,” ANZ’s global head of commodity research Mark Pervan told AFP.
Australian junior miners Termite Resources and Western Desert Resources - which operate at a much higher cost than majors BHP Billiton, Rio Tinto and Vale - have already collapsed, and there are fears others could follow.
On the supply side, record levels of iron ore production in Australia from the world’s largest miners BHP and Rio have pushed millions more tonnes into the global market.
But demand from China has weakened as the property market softens. New home prices have fallen for four straight months, according to Chinese data, weighing on steelmakers that depend on the sector as a “pillar industry”, Pervan said.
While the Australian jump in supply - driven by strong prices three years ago - was forecast, the continued output from Chinese miners has exacerbated the price decline.
The plunge in the iron ore price has been so severe that Goldman Sachs last week called it “the end of the Iron Age”. In a research note, analysts Christian Lelong and Amber Cai wrote that “in our view, 2014 is the inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean”.
“In other words, the end of the Iron Age is here.”
Lelong and Cai added that the “weak demand outlook in China and the structural nature of the surplus make a recovery unlikely”.
HEAVYWEIGHTS STILL TURNING A PROFIT
Despite the tough environment, BHP and Rio, as low-cost producers, are still raking in large profits. The falling prices could also help them by removing smaller competitors, UBS global commodity analyst Daniel Morgan said.
“If prices are above US$100 a tonne where they have been, it encourages new entrants,” he told AFP, citing the massive US$10 billion Roy Hill iron ore project in Western Australia as an example.
“And so while that’s happening, it makes sense for BHP and Rio and Vale to put more tonnes into the market to make a return but also to discourage new entrants.”
UBS estimates that break-even costs for BHP and Rio are about $US40-US$45 a tonne but smaller Australian miners such as Atlas Iron and Mount Gibson - seen as marginal producers at current prices of about US$85 - may come under pressure.
A lift in prices early this week has raised hopes, and a “relief rally” was possible if there were multi-day gains, Pervan said. But he did not believe the fundamentals were compelling enough for a strong recovery.
Even so, some financial institutions, including ANZ, have forecast the iron ore price to return towards US$100 by the end of the year with seasonal weakness set to lift in November and December on restocking activity.
Iron ore prices, even at US$85 a tonne, were “structurally high” compared with where they were in past decades, added HSBC’s chief economist for Australia Paul Bloxham.
“We see iron ore staying at a level that continues to make the bulk of Australia’s iron ore producers profitable,” he said. “Certainly, Australia’s mining boom is over, but mining GDP is continuing to expand -- it’s just that it’s expanding at a more modest pace than it used to.”
2 comments:
Iron ore miners battle for survival as ‘perfect storm’ hits
High-cost Australian miners are battling for survival as plunging iron ore prices push many to breaking point, with analysts seeing no significant short-term recovery as Chinese demand for steel wanes in line with sliding property prices.
AFP
17 September 2014
High-cost Australian miners are battling for survival as plunging iron ore prices push many to breaking point, with analysts seeing no significant short-term recovery as Chinese demand for steel wanes in line with sliding property prices.
Australia, the world’s largest exporter of iron ore, is heavily dependent on China’s hunger for resources even as its economy transitions away from an unprecedented mining investment boom.
A year ago, iron ore fetched about US$135 a tonne. This month it hit a five-year low of US$81.90, slumping 40 per cent since January. The weaker price has also hit Australian government coffers, reducing tax revenue just as it makes a push to bring the budget back into surplus.
Australia produces 17 per cent of the global iron ore, second only to China’s output of 39 per cent. “I think the iron ore market’s got a perfect storm at the moment,” ANZ’s global head of commodity research Mark Pervan told AFP.
Australian junior miners Termite Resources and Western Desert Resources - which operate at a much higher cost than majors BHP Billiton, Rio Tinto and Vale - have already collapsed, and there are fears others could follow.
On the supply side, record levels of iron ore production in Australia from the world’s largest miners BHP and Rio have pushed millions more tonnes into the global market.
But demand from China has weakened as the property market softens. New home prices have fallen for four straight months, according to Chinese data, weighing on steelmakers that depend on the sector as a “pillar industry”, Pervan said.
While the Australian jump in supply - driven by strong prices three years ago - was forecast, the continued output from Chinese miners has exacerbated the price decline.
The plunge in the iron ore price has been so severe that Goldman Sachs last week called it “the end of the Iron Age”. In a research note, analysts Christian Lelong and Amber Cai wrote that “in our view, 2014 is the inflection point where new production capacity finally catches up with demand growth, and profit margins begin their reversion to the historical mean”.
“In other words, the end of the Iron Age is here.”
Lelong and Cai added that the “weak demand outlook in China and the structural nature of the surplus make a recovery unlikely”.
HEAVYWEIGHTS STILL TURNING A PROFIT
Despite the tough environment, BHP and Rio, as low-cost producers, are still raking in large profits. The falling prices could also help them by removing smaller competitors, UBS global commodity analyst Daniel Morgan said.
“If prices are above US$100 a tonne where they have been, it encourages new entrants,” he told AFP, citing the massive US$10 billion Roy Hill iron ore project in Western Australia as an example.
“And so while that’s happening, it makes sense for BHP and Rio and Vale to put more tonnes into the market to make a return but also to discourage new entrants.”
UBS estimates that break-even costs for BHP and Rio are about $US40-US$45 a tonne but smaller Australian miners such as Atlas Iron and Mount Gibson - seen as marginal producers at current prices of about US$85 - may come under pressure.
A lift in prices early this week has raised hopes, and a “relief rally” was possible if there were multi-day gains, Pervan said. But he did not believe the fundamentals were compelling enough for a strong recovery.
Even so, some financial institutions, including ANZ, have forecast the iron ore price to return towards US$100 by the end of the year with seasonal weakness set to lift in November and December on restocking activity.
Iron ore prices, even at US$85 a tonne, were “structurally high” compared with where they were in past decades, added HSBC’s chief economist for Australia Paul Bloxham.
“We see iron ore staying at a level that continues to make the bulk of Australia’s iron ore producers profitable,” he said. “Certainly, Australia’s mining boom is over, but mining GDP is continuing to expand -- it’s just that it’s expanding at a more modest pace than it used to.”
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