Iron ore giants “race to the bottom” despite fear of supply glut

China , Commodities , Iron ore , Metals , Steel Jul 23, 2013 No Comments

iron oreIron ore giants are digging more for less to tighten their stranglehold on the world’s second-biggest commodity market, as competitors struggle. By doing so, they appear to defy logic, with demand for the steel-making raw material cooling in top customer China and a price-eroding supply glut looming.

While the looming end to US central bank stimulus sent precious and base metals prices plummeting last week, the iron ore price is primarily driven by events in China. Analysts believe that the companies are ramping up production, despite fears of a supply glut, to build economies of scale into their operations that will keep costs low and squeeze smaller competitors margins.

BHP Billiton, the world’s largest resources group, reported “A strong year of production as two of our major assets, Western Australia Iron Ore and Escondida, exceeded production guidance and annual records were achieved across seven operations and five commodities“. This translated in production of 169.9m tonnes of iron ore in the year to June a 7% year-on-year rise. However, expansion in the Pilbara region of Western Australia saw iron ore output surge 17.7% in the final quarter of the year. BHP under the former CEO, Marius Kloppers, stuck to a policy of mining at maximum rates as long as profits held up. New BHP CEO Andrew Mackenzie is showing no signs of changing tack.

Rio Tinto on Tuesday pointed to moves to lift its iron ore production capability by 35% to 360 million tonnes in 2015, estimated by analysts to carry a $5 billion price tag.

Vale, the world’s biggest iron ore miner, this month was cleared by Brazil‘s Environmental Protection Agency to undertake a $19.5 billion expansion of its Carajas iron ore mine, one of the world’s richest and most productive.

Australian mining magnate Gina Rinehart‘s $10 billion Roy Hill iron ore project has overcome key hurdles holding up debt negotiations, a move that could pave the way for the mine to start producing by September 2015, adding 55 million tonnes a year and making Roy Hill Australia’s fourth-largest iron ore producer.

The iron ore price declined 1.7% to back below $120 on Friday, ending an almost 7% rally that began last week.

Most analysts predict a steady decline in the price of iron ore towards the end of this year and into 2014 on the back of a slowdown in China which consumes more than 60% of the 1.1 billion tonne a year seaborne trade.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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