Daily iron ore price update (billionaires to wipe themselves out?)

The news continued to be poor in the iron ore complex yesterday:

Although spot held up, it’s on its Pat Malone and it won’t last. The caning of rebar is especially a concern and it is quite clear that the restock is done, not just in ore but it appears steel as well:

The refusal of spot to move has blown spreads to swap and rebar back to their uncomfortable wides:

And this has happened despite an ongoing draw down in Chinese port inventories of ore:

As I’ve said before, this should be positive because when inventory stabilises, imports should rise. But right now its making me wonder just how fundamentally weak the steel sector is.

In short, we are setting the conditions here for a sharp fall in spot ahead.

Which will not help the news today, which is all about furious agreement with my my emerging iron ore glut thesis and what that means for emerging producers. Nothing good! From The Australian:

UBS analyst Glyn Lawcock warned that the rail lines being considered by the likes of Gina Rinehart’s Roy Hill and infrastructure group QR National could add significant new supplies to the iron ore market at the same time as heavyweights Rio Tinto, BHP Billiton and Fortescue Metals were expanding their production, hurting iron ore prices and potentially rendering new projects uneconomic.

“The additional potential supply that Atlas, Hancock and Wah Nam could provide is a negative to the iron ore trade and this ultimately leads us to a view that developing rail infrastructure could in fact make these aspiring projects less economic due to lower margins,” Mr Lawcock said.

“These new entrants could effectively become the top of the cost curve . . . which effectively sees these new entrants generate a zero (free cashflow) margin.”

UBS is predicting a long-term iron ore price of $US72 a tonne at a US dollar exchange rate of 80c, in line with Mr Lawcock’s forecast operating costs for the new entrants.

Yep. More Australian production plans are headed for the shelf.

David Llewellyn-Smith
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      • There are some crazy bankers out there though, and there are no consequences for them if it blows up. The GFC showed us that.

          • Hasn’t it been her lifetime dream to build Lang’s mine? If she can find a banker crazy enough to lend her the money I reckon she’ll go for it. There’s a lot of emotional capital invested in Roy Hill.

            I mean Twiggy’s going all out as well. As we discussed the other day, if ore prices take off again, the pay off will be enormous. If they don’t (and FMG blows up) Twiggy walks away scot-free into a very comfortable retirement. Why wouldn’t you go for it?

          • Especially for her father’s memory, I don’t see Gina risking the farm on Roy Hill at this time. And that is what it would be.

            FMG are only talking about re-instituting the 2nd Solomon’s expansion. Let’s just wait and see if that too evantuates. I have major doubts about that , certainly there seems no sign yet of “on the ground” project ramp up as yet and capital costs restrainst are still in full force throughout the company.

            There is a lot of perception management going on methinks.

          • Ultimately it depends on how bonkers the bankers are. If recent history is any guide, then I would say they’re completely bonkers.

  1. I don’t know about all this junior miner negativity. Think about the situation from a Chinese steel industry view point, such as:
    Would we be seeing sub $100/tonne iron ore prices without a credible supply threat from junior miners and W.African supply?

    Maintaining a viable threat has a value (probably about $60/tonne) if this is averaged over the 600M tonnes annual usage, than we get an idea of the $ value the junior mining threat represents.

    A little fancy options math can translate this value into a derivative contract and from there into a source of funding for the most credible junior miners.

  2. Prediction: as it starts going south for the tycoon miners in Oz, we’ll see major whaaaa-mbulance articles in the news media controlled by Australia’s own self-made Dad-made squillionaire, Sheila Whinehard.

      • I am putting money on this. I’m holding off buying a house until the mining bust bursts the housing bubble.

        That’s a big bet I’m making, what about you?