While the iron ore sector is already facing the brunt of the commodity price slide, which hit a new five-year low of $US83.60 a tonne over the weekend, observers are warning the effects are likely to be felt across the Australian economy.
A swift retreat in Chinese demand has already driven global iron ore prices to near five-year lows and local coal prices to their weakest in six, with analysts warning that the outlook for shipments to the country remains grim in the wake of its economic slowdown and festering oversupply.
Rio Tinto and BHP Billiton in Australia, and Vale in South America – the world’s top three iron ore miners – have been ramping up production in a bet that their enormous efficiencies of scale will allow them to profit, even though prices are now less than half what they were four years ago. The companies are also betting that the lower prices will force higher-cost competitors out of the market, giving them more pricing power in the long run.
We would normally expect low prices to eliminate supply and, to some extent, that is happening. Iron ore mines in China – the world’s largest and most expensive producer – are closing: production is expected to fall about 15% this year and again next year as margins narrow.
On the face of it, Russia and Australia don’t appear to have too much in common. But one thing they do have in common is a strong dependence on a single commodity, the supply of which makes or breaks their respective economies. Although for Russia this commodity is gas, Australia is the biggest iron ore exporter, and its mines, often in the Outback, typically operate at lower costs than international rivals.
A leading economist, Chris Richardson of Deloitte Access Economics, says that for every AUD 20 that Australia earns in exports, AUD 1 comes from this one resource in the ground. It is a critical earner.
Late Tuesday, the price of iron ore delivered to China had fallen to less than $87 a metric ton for the first time since August 2012, from $100 in May this year. In China, a key contract price for steel reinforcement bars, or rebar, was at around $493 per ton, a seven-year low.
The consequences of those low prices is starting to be felt. Western Desert Resources, operator of the Roper Bar Iron Ore Project in the Northern Territory, Australia, appointed the advisory firm Korda Mentha as voluntary administrators on Friday. This decision came on the heels of a failed appeal to Macquarie to renegotiate funding operations for Roper Bar, as no further support would be available.
The highest cost iron ore miner at present is believed to be Gindalbie Metal’s 48% owned Karara Mining, which is developing a mine near Geraldton in Western Australia’s south-west. According to UBS, Gindalbie’s Karara mine has an all in production cost of about USD 100 per tonne.
But for some producers, contractual commitments combined with financing pressures may leave them with little choice but to continue mining at maximum levels, even if they are losing money, which is similar to the situation of many local coal exporters.
In India, the Jharkhand government has ordered closure of a dozen iron ore mines in the state, including those of Tata Steel, SAIL and Orissa Manganese and Minerals, following the Centre’s move to amend mineral concession rules of 1960 under which mining leases for major minerals are given out.
Stockpiles at Chinese ports climbed to 111.25 million tons as of Sept. 5, a gain of 29 percent this year and near the record 113.7 million tons in July, according to Shanghai Steelhome Information Technology Co.
Macquarie Group Ltd. reduced its price forecast for this year by 6.5 percent to $102 a ton, and predicted a further decline in 2015 to $92, analysts including Jim Lennon and Graeme Train wrote in a report today.