Iron ore prices may tumble a further 15 percent and stay low for as long as three years as expansions add to a global surplus, according to former BHP Billiton Ltd. (BHP) executive Alberto Calderon.
Prices may trade between $70 and $80 a metric ton for two to three years as the market adjusts to increases in supply and a decline in demand in China, Calderon, a board member of Orica Ltd. (ORI), the biggest supplier of chemicals and explosives to the mining industry, said in an interview.
Iron ore last week fell below $85 a ton for the first time in five years as China’s economy, the world’s biggest buyer, showed signs of losing momentum amid an expanding global glut.
The largest iron ore producers are targeting record shipments, betting that the increase will offset the plunging prices and force less competitive mines to close. About a quarter of global supply is break-even or loss-making at prices now and production cuts are happening, according to UBS AG.
“Right now the wall of excess supply is obvious,” Calderon said, ahead of a speech today to Bloomberg’s “Beyond The Boom: Mining to Dining” seminar in Melbourne. “At some point someone has to take a lead and say we are all just heading towards a cliff. At some point, common sense will have to prevail.”
Ore with 62 percent content at the Chinese port of Qingdao dropped 1.7 percent to $83.80 a dry ton on Sept. 5, sliding to the lowest level since September 2009, according to data compiled by Metal Bulletin Ltd. The raw material decreased for a fifth week in the longest run of losses since May. It was little changed yesterday at $83.98 a ton. Supply Excess
“With this excess of supply, the price will be depressed beyond what people expect,” Calderon, said in the interview yesterday in Melbourne. “Until mines close it’s a world of $70 prices of iron ore.”
Calderon was chief executive of BHP’s aluminum and nickel unit from December 2011 until April 2013.
Iron ore may average $80 a ton next year, according to Goldman Sachs. Morgan Stanley and Citigroup Inc. expect prices to average $90 next year.
The ore has declined 38 percent this year, according to Metal Bulletin, prompting some small producers from Sweden to Canada to idle or close mines. Rio Tinto Group (RIO), the second-biggest producer, last month forecast that about 125 million tons of higher cost supply may exit the market this year. Private Investor
A majority of mine closures or curbs to output won’t necessarily take place in China as producers anticipate, said Calderon, who also is raising private equity funds for mining investments. “China’s supply in iron ore will not significantly reduce, so it means that a lot of it will come from” higher-cost miners in Australia, Calderon said.
Output in China may decline 10 percent over the two years to 2015, trimming production by 40 million tons, according to Goldman Sachs Australia Pty’s Global Investment Research Executive Director Christian Lelong. Global producers may also be underestimating the extent of potential price declines, Lelong said in a Sept. 3 note.
China’s domestic ore costs about $75 a ton to $145 a ton to produce, the National Development & Reform Commission said in May. That compares with a break-even price per ton of $45 for Rio, $50 for BHP and $74 for Fortescue Metals Group Ltd. (FMG), UBS AG estimated in a Sept. 5 report.
To contact the reporter on this story: David Stringer in Melbourne at dstringer3@bloomberg.net
To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net Keith Gosman, Andrew Hobbs
Perth mining entrepreneur Tony Sage says a raft of high-cost junior miners face a battle to stay afloat amid a sustained decline in the iron ore price to fresh five-year lows.
Mr Sage, executive director of Cape Lambert Resources, said a slump in the price to $US83 a tonne was likely to cause more problems for smaller players following the collapse of Western Desert Resources on Friday.
“If you haven’t got your existing infrastructure in play, it makes things very difficult,” Mr Sage said. “Companies [producing iron ore] in the $US70 and $US80 range that can’t reduce their costs and get extra tonnes out are really going to hurt. Companies that are suffering from infrastructure bottlenecks and can’t get a product to port are going to be in trouble.”
Northern Territory producer Western Desert collapsed late on Friday although the receiver on Monday was unwilling to clarify the number of employees at the mine or indicate whether output is likely to be cut.
Grange Resources, which operates the Savage River mine in Tasmania, steel maker Arrium with operations in South Australia, and Gindalbie Metals which has half of the Karara mine in south west of Geraldton in WA are now under scrutiny as analysts assessed the near term prospects for their mining operations.
The failure of Western Desert followed the collapse in July of Sherwin Iron after it failed to raise $36 million from shareholders as it sought to develop a mine in the Northern Territory.
In June a South Australia mine, Cairn Hill which was producing 1.8 million tonnes a year of magnetite, closed. It was half owned by IMX Resources.
The highest-cost iron ore miner at present is believed to be Gindalbie Metal’s 48 per cent 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 around $US100 a tonne, with Grange at $US88 a tonne and Atlas Iron $US85 a tonne.
Loss-making
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 .
Analysts said investors are waiting to see if the downturn in the iron ore price will result in other miners failing. It could help clear out high-cost producers and set the scene for a price recovery. “There is the potential for further price pressures to come over the next few months,” one Melbourne-based analyst said. In part, this reflects the seasonal nature of Chinese demand, which is routinely stronger from around November as its steel producers build stocks ahead of the Chinese Lunar new year, in late January or February.
That's then lowest break-even estimate for Fortescue I have ever seen. Looks to me as if those prices are FOB Australia and don't include the cost of capital.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
The lion’s share of iron ore profits are shared between three firms: BHP, RIO and FMG. BHP estimates that for every $1 fall in the iron ore price it loses $135 million in profit. Rio estimates $122 million. For the big two, the last quarter average realised prices at $106 so if we hit $70 then profits will fall $9 billion all things equal. FMG will be making losses at $70 so it’s entire $3 billion is gone as well.
Of course, big volume expansions, cost cuts and the Australian dollar may come down too, but none of it will be anywhere near enough to offset the huge margin squeeze. Let’s guesstimate an $8 billion blow to profits assuming a few things go the big firm’s way.
That’s going to mean no new capital management measures – buy backs or boosted dividends – at either of the major two firms, for whom profits will fall a combined 25-30%, with accompanying equity price pain. $70 is an existential crisis for FMG that it could well lose, leading, in turn, to political crisis as China will be best placed to buy it.
The entire iron ore junior sector will also be wiped out.
All miners will accelerate there cost-cutting efforts, and with more exploration and growth projects shelved, the mining capital expenditure cliff will steepen and fall to 2 of GDP or less by 2016.
This will be devastating to the mining services sector, which is already reeling. The bankruptcies already overtaking that sector will spread and bad loans will also inevitably flow back to the banks, though not in any great volume given miners typically borrow in debt markets or raise equity.
The Energy Information Administration (EIA) estimates that US WTI crude oil will average USD98.28/bbl in 2014 and USD94.67/bbl in 2015, down from last month’s estimates of USD100.45/bbl and USD96.08/bbl, respectively. The group also forecasts Brent crude oil to average USD106/bbl in 2014 and USD103/bbl in 2015, down from last month’s estimates of USD108.11/bbl and USD105/bbl, respectively. The EIA revised up its US crude oil production output in 2015 by 250kb/d to 9.53mb/d, the highest level since 1970.
Base metals finished lower as a firmer US dollar reduced the purchasing power of non-US consumers. Brent crude oil fell to its lowest level in almost 17 months on surplus concerns after the EIA lifted its crude oil supply forecasts. US WTI crude oil lifted after Tallgrass Energy Partners said it may delay its Pony Express pipeline connecting Cushing to Wyoming to November. Iron ore fell by 0.5% to USD83.20/t (CFR China).
Nickel prices slumped 5.1% to USD8.55/lb on easing supply concerns after a Filipino congressman said that any mineral ore export ban in the Philippines may take seven years to be implemented. The Philippines accounts for nearly all of China’s nickel ore and concentrate imports after Indonesia enacted a mineral ore export ban earlier this year.
Wait times for LME aluminium at Glencore’s Pacorini Metals warehouses in Vlisssingen fell from 743 days in July to 599 days in August. Goldman Sachs’ Metro warehouses in Detroit also saw wait times for aluminium fall from 651 days in July to 620 days in August.
Coal India, India’s largest coal producer, lifted coal output by 9.0% y/y to 34.54Mt in August but still came short of reaching its target of 35.13Mt. From April to August, the company produced 175.88Mt of coal, missing its target of 183.94Mt by 4.4%.
BEIJING, Sept. 8, 2014 /PRNewswire/ -- The health of China's steel sector may be poised for a less than robust immediate future, according to the latest Platts China Steel Sentiment Index (Platts CSSI), which showed a September reading of 45.88 out of a possible 100 points. This is down 1.09 points from an August reading of 46.97 and is the third consecutive month the index has remained below 50, indicating that market participants see demand for steel softening.
China's steel sector expects construction steel prices to fall over September on the back of the slowdown in China's property sector, the index survey showed.
The Platts China Steel Sentiment Index Survey – September 2014(a figure over 50 indicates expansion; under 50 indicates contraction)
The most positive reading in the latest index is expectations for new export orders, which rose by 16.50 points in September from the previous month. The outlook for crude steel product also improved, with the index moving up 6.76 points from August to 41.38 in September.
"The Chinese steel industry has been relying heavily on the export market in recent months to compensate for very soft demand in the domestic end-user markets," said Paul Bartholomew, Platts managing editor for steel and raw materials. "The massive fall in expectations for prices of long steel products is not surprising given the slowdown in the property sector."
The latest CSSI indicates the industry is largely expecting a drop-off in domestic orders with a reading of 44.82 points – 2.62 points lower than the previous month. The long steel prices index plunged from August's 64.29 points to 18.75 in September, and flat steel sentiment index fell 18.54 points to 10.63. While market participants expect new export orders to increase, price expectations remain bearish, falling 25.50 points month over month to 10.11 points in September.
"The market situation does not bode well for steel producers and it's certainly not good for iron ore miners at a time of huge supply into China. Lower steel prices will put more pressure on iron ore prices which have already hit a five-year low," Bartholomew said.
The monthly Platts CSSI is based on a survey of approximately 50 to 75 China-based market participants including traders, stockists and steel mill operators. The survey of month-ahead sentiment is conducted during the last full working week of each month, with the results published via press release and Platts' products and services before the 10th of the next month. Platts began tracking steel sector sentiment in China in May 2013. The Platts China Steel Sentiment Index survey plays no role in Platts' formal price assessment processes.
LAUNCESTON, Australia, Sept 9 (Reuters) - Commodity producers worried about the outlook for Chinese demand have another reason to fret, with the relationship between pricing and import volumes appearing to break down.
China's imports of crude oil, iron ore and coal have followed a fairly consistent pattern since the 2008 global recession, rising when prices decline and moderating when they increase.
But this year has seen an almost complete breakdown of this inverse correlation for coal, and what may be the start of a similar process for iron ore and crude oil.
The conventional wisdom in the coal industry up until this year was that once it became clear the market was oversupplied, the best option for miners was to push for export volumes while trying to lower operating costs.
The theory was that if the coal was cheap enough, China, the world's biggest importer, would soak up the extra volume, allowing for economies of scale and ultimately survival in what had become a structurally low-price environment.
This worked quite well, with coal imports rising in tandem with price declines.
When the price of spot thermal coal at Australia's Newcastle port, an Asian benchmark, starting dropping from its post-2008 high of $136.30 a tonne in January 2011, Chinese buying jumped.
Coal imports rose from 6.76 million tonnes in February 2011 to 35.1 million in December 2012.
The Newcastle price was down to about $86 a tonne by the end of last year and Chinese coal imports reached a record 35.9 million tonnes in January this year.
However, since then, coal imports have been dropping steadily, falling to 18.86 million tonnes in August, the lowest since September 2012.
This decline has happened despite the continued slump in prices, with Newcastle coal dropping to $67.45 a tonne in the week to Sept. 5, a four-year low.
IRON ORE ON THE SAME PATH?
Iron ore may be starting to experience the same sort of dynamic as coal, with a slump in prices failing to provoke increased import demand by China, which buys about two-thirds of global seaborne supplies.
Asian spot iron ore .IO62-CNI=SI hit its post-2008 peak of $191.90 a tonne in February 2011 and Chinese imports dropped to 48.8 million tonnes the same month.
As the price trended lower, imports surged, reaching 70.9 million tonnes in December 2012, three months after prices hit a three-year low in September of that year.
The price continued to slide and imports reached a record 86.83 million tonnes in January this year. But even though the price is still going down, imports have trended lower.
Iron ore dropped to $83.60 a tonne on Sept. 5, a four-year low, taking the decline for the year to 38 percent.
It's perhaps too early to say a definitive trend has started in iron ore, but the similarities to coal are present.
Like coal, the global iron ore market is now substantially oversupplied and growth in Chinese demand is moderating as the economy slows and it transitions to being more consumer-led from dependence on commodity-intensive fixed-asset investment.
Still, iron ore imports rose 16.9 percent in the year to August over the same period in 2013, so it remains the case that demand growth is strong, so far at least.
What happens over the rest of the year will be key to see if iron ore is travelling the same path as coal.
While imports may rebound in September, with one trading source saying there has been a strong uptick in charters to China, they are likely to moderate again in October, given a week-long holiday that month.
What will be important is to not get caught up in the monthly swings in imports and focus on the overall trend.
If prices continue to weaken, and imports don't show strong growth in response, then iron ore may well be in the same basket as coal.
Even crude oil is showing signs of a similar pattern, despite Chinese imports accounting for only about 7 percent of global consumption.
Crude imports have trended lower this year after reaching a record 28.15 million tonnes in January, with the lower Brent price since the mid-June high for the year above $115 a barrel failing to spark a strong rebound in demand.
Again, it's too early to call a definitive trend, but it may be a sign that Chinese oil imports will no longer automatically increase when the price declines.
What appears to be the case is that China's imports of commodities are becoming more closely aligned to its actual consumption.
This means that price declines won't necessarily result in increased imports, although price increases may well lead to lower imports - the worst of both worlds for producers. (Editing by Alan Raybould)
Earlier this week, it was announced that Australian junior iron ore miner Western Desert Resources (ASX: WDR) had called in administrators after failing to negotiate a funding deal with its bankers. This comes as the iron ore spot price has fallen by over 40 per cent in less than a year; and by over 12 per cent in the last month alone.
There is a really important point to note about the recent decline in the iron ore price. But first, some historical context: if we wind back the clock a few years, the “bear case” against the iron ore producers primarily related to the unsustainable nature of China’s demand growth driven by its fixed asset investment binge. With so much of China’s steel-intensive construction generating insufficient cash flow to service the debts with which it was financed, it was hardly a sustainable source of demand growth for the long-term. (Your author feels somewhat credible commenting on the bear case; given he spent many of these years cutting his teeth at arguably the most famous short-selling-dedicated hedge fund in the world).
Fast-forward back to today, and we see the iron ore price has come off substantially, and we are starting to see some of the smaller high-cost producers literally go out of business. Yet here is the important point: the substantial decline in the iron ore price has occurred notwithstanding a reasonably steady level of demand growth out of China. That is, the decline has been primarily supply-side-driven, not demand-side-driven.
This week, Macquarie’s elite commodity team cut their iron ore price forecasts by up to 20 per cent, versus their forecasts from just four months ago. In their note to clients, Macquarie said: “We still feel comfortable with the demand side of iron ore… However, we heavily underestimated supply growth – this is the major delta driving our change of view.” (Interestingly, Macquarie was the bank that rejected Western Desert Resources’ funding proposal, sending it into the hands of administrators – we now probably understand why).
So for those who believe the iron ore price could not possibly fall any further, just remember that the main pillar of the iron ore bear case is actually yet to play out. To believe a sustained rebound in the iron ore price is to believe a gigantic reacceleration in Chinese construction like we have never seen before. This seems like a very big call to make.
I think a lot of hope is going out the window and that's going to be replaced with a hard realism that is going to hurt. Everybody is talking about the smell, but no one is addressing the elephant in the room. Time to suck it up and see where we stand. Despite bullshit from b_b et al, this is important and will have a profound effect on Australia. Time to re do the sums.
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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