Daily iron ore price update (Rio write-off)

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Find below the iron ore price table for January 17, 2013:

Not much to add on a quiet day, except to note that 12 month swaps are doggedly hanging on to the $120 support price:

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This bodes well for my $130+ first half price forecast.

But onto the news of the day that matters. Rio has boned its CEO:

Rio Tinto expects to recognise a non-cash impairment charge of approximately US$14 billion (post tax) in its 2012 full year results. These impairments include an amount of approximately US$3 billion relating to Rio Tinto Coal Mozambique (RTCM), as well as reductions in the carrying values of Rio Tinto’s aluminium assets (mostly Rio Tinto Alcan (RTA) but also Pacific Aluminium) in the range of US$10-11 billion. The Group also expects to report a number of smaller asset write-downs in the order of US$500 million. The final figures will be included in Rio Tinto’s full year results on 14 February 2013.

Tom Albanese has stepped down as chief executive by mutual agreement with the Rio Tinto Board, and Iron Ore chief executive Sam Walsh has been appointed as his successor with effect from today. Doug Ritchie, who led the acquisition and integration of the Mozambique coal assets in his previous role as Energy chief executive, has also stepped down by mutual agreement.

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You can read any number of adoring analyses in the business media about the rise of Sam Walsh. My own take is that this is a double-edged appointment. Iron ore represents some 85% of Rio’s net income (though only half of its revenue), making it not much more than Fortescue’s big brother. Given this, it makes a certain amount of sense to put the iron ore boss in charge of the whole firm.

But Walsh is also the mastermind of Rio’s current “shop ’til you drop” iron ore strategy. Where others have seen fit to cut back iron ore production expansion plans, Rio has not, making it the prime mover on the supply side in the ongoing iron ore price correction (excepting today’s temporary pop).

Long term, Rio can produce iron ore in the high $20s per tonne. So, like BHP, it is at the bottom of the price curve. It may be that Rio’s strategy is right. It will knock out higher cost producers, take market share, and growing volumes will more than offset price falls. Then again, it might not. As Chinese demand growth remains in the low single digits (at best), India may re-enter the market, the Chinese may protect their producers, and the price of iron fall faster than Rio’s volume growth. That is what happened last year. The variables have not changed. Only shifted temporarily in favour of suppliers.

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Rio has gone all in on Walsh and the mad dash for iron ore production. As China continues its structural shift away from steel-intensive growth, I would look for a more diversified mix if I wanted exposure to either iron ore, commodities or China (which I do not!).

But who am I to judge? The share price only fell half a percent last night.

The AFR also provides a series of quotes from the iron men juniors today which are worth noting:

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Nev Power of Fortescue:

“I think we will see some corrections in the short term due to that volatility.” Mr Power forecast that the iron ore price will average $US120 a tonne this year, but emphasised it could overshoot and undershoot that mark at various points. But by the end of the year and early 2014, he expects iron ore could trade in a lower range of $US110 to $US120 a tonne as new supply from expansion projects from Fortescue, Rio Tinto and BHP Billiton hit the market.

Correct, although the range is on the optimistic side to my mind. Within a year I still expect iron ore to struggle to stay in three figures.

Mount Gibson Iron chief executive Jim Beyer said he believed the recent iron ore price gains had been driven by “real demand”.

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Half right.

BC Iron managing director Mike Young said:

“Trying to see through the haze in China, again the big picture view is there’s still a lot of growth to go on in China. We’re not overly concerned about steel demand in China generally.”

Wrong. Chinese demand growth is going to undershoot the assumptions built into current supply expansions big time. Young belied his own bravado when he also said he was focused on cost control, quite rightly.

“Volatility” is the new buzz word but the master trend will remain down.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.