Find above an interesting short discussion aired yesterday on ABC’s Inside Business assessing the prospects facing the iron ore market. Of most interest, Goldman Sach’s chief Australian economist, Tim Toohey, sees the iron ore price falling to $US80 from 2015, whereas 2MG Asset Management’s Mike Mangan lambasts the Australian iron ore producers’ “collective madness” for ignoring market fundamentals and continuing to increase supply. Obviously this is a nod to H&H’s long term analysis.
ALAN KOHLER: So what are your analysts saying about the iron ore price: $120 or less than that?
TIM TOOHEY, ECONOMIST, GOLDMAN SACHS: Well we’ve got it less going forward.
ALAN KOHLER: How much less?
TIM TOOHEY: It actually holds around that level for this year and then we have it going down to $80 a tonne when we get into 2015, ’16, ’17.
ALAN KOHLER: Well these guys’ll be buggered if it goes to $80, won’t it? I mean, that’s a technical term.
STEPHEN BARTHOLOMEUSZ, BUSINESS SPECTATOR: That’s a technical word.
TIM TOOHEY: I think the point around where we differ I guess from the idea to sustain itself at $120 a tonne is a couple of things. A) the domestic supply inside of China itself is not slowing down. Most of the analyst community …
ALAN KOHLER: Yes, but it’s high price though, isn’t it, Tim?
TIM TOOHEY: It is, and it’s less and less economic, but it’s not actually slowing down, it’s still coming on. The second thing, they’ve developed a massive scrap market that has surprised just about everyone on the street and that’s come on very, very quickly, so there’s an alternative source of supplied steel.
And I think the other point is that the inventory cycle that we’ve seen, it’s not going to go back to 2012-type levels. We think it’s actually starting to level out about now and we can see that in terms of the way the market pricing is going for steel.
ALAN KOHLER: What do you think of the iron ore miners?
MIKE MANGAN, PORTFOLIO MANAGER, 2MG ASSET MANAGEMENT: Well just listening to Ken, two things struck me.
First of all, you asked him about what the price is going to be and he said he had no idea, which I think is pretty scary for a guy that wants to invest I don’t know many billions of dollars building a train line.
And secondly, he talks about demand, but he doesn’t talk about supply. You guys have got 60 per cent increase in supply coming along in the next five years. What’s that going to do to the price?
So I think there’s almost a collective madness amongst these iron ore miners that they just don’t get it. I mean, he talks about us talking as noise, but he’s not listening and neither are any of his peers.
ALAN KOHLER: Well he’s listening to his customers. That’s a bit tough.
MIKE MANGAN: But he’s not listening to people like Goldman Sachs who are doing detailed analysis of all the supply that’s coming along and he’s just ignoring it and says he doesn’t know what the price is going to be anyway.
ALAN KOHLER: Well, he wants to build a mine!
STEPHEN BARTHOLOMEUSZ: Take an example: Rio Tinto last year produced 237 million tonnes. This year they’re heading towards 290. They’re considering expanding capacity to 360 million tonnes at a cost of $5 billion.
The big Pilbara miners, BHP and Rio are still in that increasing supply mode. And they’re the low-cost guys.
So an enormous amount of supply is going to come into this market. I think your guys are saying 200 million tonne surplus by 2015.
TIM TOOHEY: Well to put it in growth rates, we’ve got global demand growing in the order of about three to 3.5 per cent over the next couple of years and we’ve got supply heading towards nine to 10 per cent. So, we actually think at the moment the market’s fairly close to balance, so we tip into oversupply by first half next year.
STEPHEN BARTHOLOMEUSZ: And at that point, something could happen which means you’ve got – some people are going to have to the supply out and that’ll be the high cost guys.
