It's down from 93.5c to 91.6c now, but I don't that is about commodity prices. Probably more about the increase in bond yields O/S and the slump in the S&P over the past few days.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Sure they will survive, but not all of them. Just like here.
"That’s hurting mining companies in China where 20 percent to 30 percent of mines have closed, according to the China Metallurgical Mining Enterprise Association."
Sure they will survive, but not all of them. Just like here.
"That’s hurting mining companies in China where 20 percent to 30 percent of mines have closed, according to the China Metallurgical Mining Enterprise Association."
Iron ore shed a further 1.2 per cent from its already beleaguered price overnight, piling further pressure on small miners and threatening additional pain for the Australian economy.
The latest, fresh five year low came as the price of iron ore for immediate delivery to the port of Tianjin in China fell more than a per cent to $US82.20.
The decline compounds an already precipitous fall in the value of the commodity, which has put strain on smaller iron ore players both in Australia and in China and has sparked a chorus of concern about the outlook for the local economy.
Further declines are expected and analysts including Goldman Sachs and CLSA have suggested the iron ore price could fall to $US80 a tonne or even lower.
It takes two graphs to put the current mini-panic over the iron ore price into perspective, to realise that Australian miners should eventually do quite nicely out of the present shakeout.
That's with the obvious caveat that first they have to survive the rationalisation. Some won't.
That's unfortunate for the marginal mines' owners and employees, but it's hardly surprising that the highest-cost producers fail when prices come off the boil. It's as normal in mining as drought is in farming. And from the overall Australian economic viewpoint, it doesn't matter. <P>
It's the nature of news to favour the biggest number, the scariest percentage, the sharpest comparison. (There are whole blogs devoted to frightening punters into reading.) Thus you will have seen plenty of mentions about how far the iron ore benchmark has fallen so far this year or, even more dramatically, since its peak four years ago.
A quick glance at the accompanying 20-year graph shows why no-one bothers to talk about how it compares with anything much before that. Iron ore is back where it was five years ago, but remains sharply higher than any point prior to that.
Prices soaring over the past decade have had the inevitable result of spurring a sharp increase in supply, which inevitably reduces prices. Like every boom that ever was in any commodity, the animal spirits tend to get a bit carried away on the upside and some projects that shouldn't have started come to an end.
Meanwhile, even as the price cycle rolls along, the macro impact on Australia hasn't been as shocking as some commentary might have you believe.
Yes, iron ore is our biggest single export and its price is down this year by a third or so – which, on the surface, might mean we're going to suffer a sharp fall in export income.
But the price fall has been almost matched by the increase in production, meaning there's not much difference in total export revenue. How long that stays the case depends on how long it takes this cycle to roll through.
Iron ore fell by 1.2% to USD82.20/t (CFR China) on continuing surplus concerns, as Chinese steel mills and traders remain reluctant to buy iron ore given tight credit conditions, slowing steel demand, falling steel prices and the wide availability of discounted iron ore from China’s ports stocks.
Nickel continued to fall on easing supply concerns after a Filipino congressman said earlier in the week that any mineral ore export ban in the Philippines will take time to implement. The Philippines accounts for the majority of China’s nickel ore and concentrate imports. Reports suggest that a draft proposal to change the Philippine’s Mining Act will be submitted late next year and take potentially longer to implement. A Filipino senator also said that a mineral ore export ban is not a priority for the Philippine’s president. Gold futures declined on falling safe-haven demand as tensions eased in Ukraine.
Australia’s IMX Resources has agreed to sell its Mt Woods iron ore project in South Australia after the decline in iron ore prices made the company review its timing for securing funding. The company had earlier planned to move the project into production by late 2017, and expected to produce 2.5-3.5Mtpa of iron ore.
Metallurgical coal exports from Canada’s Ridley Terminals fell by 34.1% y/y to 305kt in August. From January to August, coking coal exports from the terminals have declined 37.4% y/y to 3.27Mt.
Taiwan’s coking and thermal coal imports rose by 20.2% y/y to 5.98Mt in August
JOHANNESBURG (miningweekly.com) – Amid a market environment in which iron-ore prices were at their lowest level since the 2008/9 financial crisis, fund adviser Liberum believed the extent to which any fourth-quarter supply restock would drive prices higher may be limited compared with prior years.
The firm said in a note to clients that there were a few key differences in the demand, supply and inventory dynamics present this year than that of 2012, where a restock drove a strong bounce in iron-ore prices.
“With demand growth in China at half of 2012 levels, supply growth [greater than] 160% and iron-ore inventories 12-million tons, we don’t think the ingredients are present for a restock to drive a sustainable rally in prices are present.
“Indeed, the three conditions for a material restock – financial liquidity, expectations of an improvement in demand and scarcity of supply – all point to a much softer restock than in 2012,” Liberum outlined.
Demand indicators were still tracking well behind 2012 levels and deteriorating and, while headline crude steel production was strong, at 6.2% year-to-date, the drivers of iron-ore demand remain weak.
In addition, pig iron production had been tracking below crude steel production growth as Chinese scrap consumption grew, substituting the use of iron-ore.
“Looking back to the 2012 restock, pig iron production was running at a 3.7% growth rate in the first half of the year and grew to 4.3% in the second half.
“This year, pig iron production growth year-to-date is 40% lower, at 2.2%, and recent prints are negative year-on-year,” said the firm.
It added that a similar scenario was evident with growth in apparent steel demand.
While implied steel demand grew 6.4% in the second half of 2012, this year growth was tracking at 3.3% year-to-date, while monthly demand figures had dipped into negative territory for the first time since 2012.
On the supply side, in 2012, the four major iron-ore producers grew exports by 48-million tons, compared with a targeted 130-million tons in 2014.
“Despite this, growth in the second half of this year is likely to be of a similar magnitude, with 46-million tons of incremental supply expected to be added in the second half of this year,” Liberum outlined.
Meanwhile, iron-ore port inventories in China in August were up 12-million tons on that of August 2012, more than offsetting marginally lower steel inventories.
Converting the additional inventory into steel would see steel stock levels up to 21-million tons, or two weeks supply – more than 65% higher than in August 2012.
The International Energy Agency (IEA) forecasts world crude oil demand to increase 900kb/d to 92.6mb/d in 2014, down 150kb/d from last month’s forecast as growth slows in China and Europe. The IEA also downgraded demand growth next year by 165kb/d relative to last month, now estimating crude oil demand to lift 1.2mb/d or 1.3% y/y to 93.8mb/d. The group estimates that consumption growth in the June quarter slowed to a 2½-year low, with Saudi Arabian crude oil exports at their lowest levels since September 2011.
Base metals finished mostly lower on demand concerns after China’s consumer inflation grew less than expected last month and as US jobless claims rose unexpectedly to a two-month high last week. Nickel prices also continued to fall on easing deficit concerns, after members from the Philippines’ government signalled that any reform to the country’s mining laws, including a potential mineral ore export ban, could be some time away. The Philippines accounts for nearly all of China’s nickel ore and concentrate imports. Crude oil benchmarks rose on increasing geopolitical risks after the US joined the European Union in placing more sanctions against Russia. Iron ore fell by 0.4% to USD81.90/t (CFR China).
Henry Hub natural gas prices rose after US natural gas inventories rose by 92bcf last week, above forecasts of an 84.3bcf increase.
India’s metallurgical coal imports rose by 25.0% y/y to 20.8Mt in 1H14. Coking coal exports from Australia to India rose by 33.1% y/y to 17.1Mt in the same period.
African Minerals, owner of Sierra Leone’s Tonkolili iron ore project, said that operations will not be disrupted by government plans to shut all of the country’s ports from 19-21 September in order to stop the spread of the Ebola virus. The company said it remains on target to export 16-18Mt of iron ore from the mine.
With iron ore prices already nearly 40 per cent lower than last year’s average you don’t have to be a rocket scientist to work out that there is worse to come.
Even if the tide of new supply that has poured into the market in the past few years were to displace marginal high-cost production, which isn’t a given, the current surplus of supply over demand is likely to swell dramatically over the next few years as even more supply comes on stream.
Brazil’s Vale is in the midst of an expansion program that will see another 130 million tonnes a year of ore enter the market between now and 2018.
Anglo American’s Minas Rio mine is on the verge of first production and has a planned initial capacity of nearly 27 million tonnes.
Gina Rinehart’s Roy Hill project will add up to 55 million tonnes a year once it is up-and-running in the second half of next year.
Rio Tinto and BHP Billiton could add another 135 million tonnes a year to their already greatly increased output if they press ahead with their next foreshadowed expansions in the Pilbara.
Those projects alone would add close to 350 million tonnes a year of supply into a market that former BHP senior executive, Alberto Calderon, yesterday estimated was already oversupplied to the tune of about 100 million tonnes. His estimate that the excess of supply would be about 340 million tonnes in 2016 may underestimate the sector’s prospective position.
Calderon also said something that Rio and BHP, at least, had been saying privately for some time.
The theory behind the continued increase in supply from the low-cost, high-grade producers such as Vale, Rio and BHP is that their ore will displace higher-cost and lower-quality production, particularly the high-cost and low-quality Chinese domestic production.
Calderon, however, said China’s iron ore output would remain at about 400 million tonnes, perhaps dropping to about 360 million tonnes, but remaining at about those levels over the next few years.
Rio and BHP have assumed that for both strategic and social reasons there will be a core of China’s production that will be maintained regardless of whether the mines are operating at a loss. In effect, there is a big base of high-cost production that has to be considered as if it were at the bottom of the cost curve.
As has occurred in other commodities, there has also been a shift in the profile of China’s domestic industry away from the very small mines to larger and more efficient projects.
Even if China’s production were to fall by 40 million tonnes it would meaningless in the context of the avalanche of new supply ahead.
That raises the prospect, articulated by Goldman Sachs’ Christian Lelong in research published today, that with supply growth outpacing demand growth 3:1 the sector may face long-term price deflation. He pointed out that between 1983 and 2003 the price was steady in nominal terms, equivalent to an annual deflation rate of about 3 per cent in real terms.
Miners used to operate on the basis of an assumption that the real prices of commodities would decline over the longer term. They may have to make that same assumption for the foreseeable future.
Calderon appears to believe China will actually engineer an oversupply to drive down prices to its own benefit. It doesn’t need to because the seaborne producers are doing that to themselves and will ultimately have to bear the major share of the production cutbacks, with second-tier producers most obviously at near-term risk.
With the price, even before the big bulge in oversupply arrives, already heading south -- it was $US83.20 a tonne yesterday, a five-year low -- there is a real question mark about how far it may yet fall.
Goldman had previously forecast a 2015 price of $US80 a tonne. Now it believes the price may dip below $US80 a tonne in 2016 and 2017.
At those sort of prices only Rio and BHP among Australian producers would be making meaningful profits (they both breakeven at prices of less than $US50 a tonne, which explains why they keeping expanding their output despite the oversupplied state of the market) while Fortescue Metals Group would be marginally in the black. All the smaller mines would probably be haemorrhaging.
Calderon likened the looming plight of the sector to the experience the aluminium industry has gone through as China’s domestic sector increased supply and depressed prices. There have been massive capacity reductions in the aluminium sector in the past couple of years; Alcoa alone has taken about one million tonnes of capacity out of the market, as the Western producers try to better balance supply with demand.
Something similar, and similarly wrenching, appears destined to happen in iron ore.
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