It’s on like Donkey Kong in the rhetoric around the major iron ore miners. Clyde Russell reckons:
Any objective analysis of China and iron ore can only conclude that it’s the additional supply to the market from the mine expansions in the state of Western Australia and elsewhere that have driven the price.
The iron ore market is no longer a demand-driven story, it’s almost entirely about supply, and while there is widespread recognition that this is the case, it seems the rhetoric has yet to change.
The world’s top five iron ore producers, led by the big three of Brazil’s Vale and the Anglo-Australian pair of Rio Tinto and BHP Billiton, are bringing nearly 400 million tonnes of new supply to market within the next three years.
…The major miners have taken a deliberate gamble that they will be able to use their low costs of production to force virtually every tonne other than their own from the seaborne market, and shut down about 40 percent of Chinese domestic output as well.
Can’t say I agree. The decisions killing the market now were made 3-5 years ago when everyone – everyone – except MB believed the boom was permanent and that the $120 price floor was infallible. Capital was obtained and committed and the notion that the miners know what they’re doing now is reverse engineered. Andy Home at Reuters has a better memory:
But what’s really shocking is that the price is now at a level that until recently was collectively deemed impossibly low.
It was only in April that José Carlos Martins, executive officer of ferrous and strategy at Vale, the world’s largest producer of iron ore, told analysts that “one thing is for sure, the price will not go below $110 on a sustainable basis”.
This was not irrational producer exuberance. Martins was only voicing the prevailing consensus view when he went on to argue that “we have many times seen the price going below this level but recovering very fast”.
Well, here we are with the price trading
not just below $110 but a lot lower still. And sustainably so.
That tells you that something has gone very wrong with the iron ore narrative. This market is in a place it was not supposed to be.
Exactly. Vale is putting on a brave face, still:
Iron ore prices of $90 to $100 a metric ton are sustainable over the long term, according to Vale SA (VALE5), which predicts that some producers that started output when prices were much higher won’t be able to survive the slump.
Demand for ore in China, the biggest buyer, may expand 3 percent this year and next year, Claudio Alves, global director of ferrous marketing and sales at the world’s largest producer, said at a port-inauguration ceremony in Malaysia today, and in comments to a Bloomberg reporter. In the long term, the market won’t be oversupplied all the time, said Alves.
Err, yes it will and the sustainable price will be more like $65 or lower. Coking coal tells you why. Once these huge expansions are online the store of idle capacity ensures than any demand rebound is met with an immediate ramp-up in volumes. Once a new price floor is found, the price won’t budge ever again (or for a very long time anyway!).
Meanwhile, Rio’s Sam Walsh is maintaining the heat, from The West Australian:
But Walsh, who ran Rio Tinto’s iron ore business for eight years before taking the top job in 2013, is confident that Rio’s production costs of $20.40 a tonne in the first half of 2014, the lowest in the industry, will help it ride out the storm.
“Between me and the current iron ore price there is tier two, tier three and tier four (producers). We have positioned our business to be the lowest-cost producer in the world, so I don’t think I’ll be losing sleep about our iron ore business,” he said.
Tier two is where the rubber will hit the road. That is, at Fortescue’s doorstep, and it appears to know it. On Friday, it released an unusual bulletin, from the SMH:
Questions about the Fortescue’s ability to service its debt have crept back into the iron ore debate in recent times, after being largely put to rest during a period of strong iron ore prices in 2013.
Fortescue on Friday sought to allay those fears by saying it was still committed to its promise to reduce its gearing ratio to 40 per cent.
The miner also revealed it had just arranged for $600 million of “additional and rolled over customer pre-payments”.
…The miner also broke with tradition by publishing its October export numbers earlier than expected, with 14.4 million tonnes shipped to Asia during the month.
That represents an annualised rate of 172 million tonnes; far beyond the export guidance of between 155 million and 160 million tonnes that Fortescue promised for the 2015 financial year.
Very good, not. The more ore it produces the more the price will fall and at $75 benchmark, with a conservative estimate of 12% grade discounts, it’s already very questionable whether FMG can make money in the quarters ahead. Juggling provisional prices and pre-payments is not reassuring, it kind of smells funny.
But some are easily fooled. From The Daily Tele:
Some analysts predict the plunge in the iron ore price to below $US80 a tonne will see Fortescue scrap dividends altogether for the coming year.
If there is a silver lining to the Fortescue cloud, it is that it is hard to see things getting much worse for the third force in iron ore as it continues to ramp up production into the teeth of a savage pricing slump.
Barring a sudden surge in Chinese demand, it’ll get worse alright, much worse.
