Iron ore price rises on firmer steel outlook, but trade tensions cap gains
Lower Chinese steel product inventory driven by robust exports also supported iron ore prices above $100/t.
Those blasted furnaces
The spot price of iron ore plunged again on Thursday for a weekly loss of just under 15% and deeper into uncharted territory as negative sentiment swamps the industry.
The 62% Fe import price including freight and insurance at the Chinese port of Tianjin lost $2.30 or 4.7% to $46.70 a tonne. It was the worst daily drop since March 10 last year when the steelmaking raw material was still trading in triple digits.
That’s lowest price since November 2008 when The SteelIndex first started tracking the spot price. In 2008, the benchmark contract price was $60.80 a tonne, which was hiked from the annually-set price in 2007 of $36.63.
The Wall Street Journal reports that RBC Capital Markets has now reversed its prediction that iron-ore prices would stabilize this year and the investment bank now believes “the support for iron ore prices we had been looking for in late 2014 and early 2015 did not materialize”.
Deutsche Bank AG in a new report quoted by Bloomberg is forecasting prices may drop below $40 a tonne as exporting mines put off production cuts or simply hang on for longer because weak local currencies help to lower costs, soft crude oil drives down fuel expenses and a record slump in freight charges provide a temporary cushion.
Neither is domestic Chinese producers exit the marketing at the expected pace to make a difference to price drivers. Expectations have been that China’s domestic mines which number roughly 1,500 and produce some 350 million – 400 million tonnes a year on a 62% Fe-basis would be the main victims given sub-20% Fe grades and low tech operations.
The country’s supply is proving too be stickier than anticipated. That’s due to long term agreements and captive mines and the close relationship between local governments, steel mills and miners which means commercial imperatives often take a back seat to other considerations like jobs retention.
Questions about the majors’ strategy of upping production to push out high cost operators are also being raised. While the Big 3 – Vale, Rio Tinto and BHP Billiton – have made the most of volume-saving and now enjoy cash costs of around $20 a tonne, the are nevertheless being impacted:
A $5 decrease in the price would shave $672 million in earnings from BHP and $674 million from Rio Tinto’s net income, according to estimates by Liberum Capital, a London broker reports the WSJ.
On the demand side the outlook is even grimmer.
Steel consumption in China which imports more than 70% of the world’s iron ore fell last year for the first time since 1995 after years of overcapacity and low profitability. Global iron ore consumption will shrink this year for the first time since 2009 according to Deutsche Bank.
In a note on Wednesday Australia’s ANZ Bank commented that “mills and traders remain sidelined as threats of environmental inspections and speculation that as much as 40% of steel mill capacity is pegged for closure keeps the outlook negative,” according to Reuters.
On Thursday rebar futures on the Shanghai Futures Exchange slumped nearly 2% to hit a session low of 2,352 yuan ($379) a tonne, the lowest level since the launch of the contract in 2009.
Chinese domestic iron ore prices suffered the same fate with Dalian Commodity Exchanged contracts first launched in October 2013 hitting a record low of 381 yuan or around $61 a tonne.
After giving up 47% in 2014, the price of iron ore is now down more than a third in value this year.
9 Comments
Diogenes60025
These guys really are arrogant fools. Why don’t they expand capacity still further and offer still more product into an already oversupplied market? Maybe pay customers to take the stuff? Maybe pay the freight for them?
“There’s iron ore here, so let’s mine it and sell it to China! Then we can show our big cojones to the world, and gain great face as business strategists.”
They have allowed themselves to be played for suckers, and they still don’t get it. THERE’S IRON ORE EVERYWHERE. Iron is the most abundant element on earth! What part of that do they not understand???!!!
JH
to answer your question…water is everywhere on the planet. why do people complain they have nothing to drink.
I hope that answers your question. Thats right, not all water is equal.
NorthAfricanMiner
This story of the cash cost at 20$/ton looks like the gold mining ballet of redressing their economics to suit the market, I’d like to see the break-even cost FOB which might be lower than many but certainly not at 20$/ton.
I believe is a bit of food for investors, with shares yielding anywhere from 2% to 3% without any Beta factored in, I wonder how investors still keep hanging in there and not demanding a better (more profitable) view in the middle-long term. But as usual, we are in the world of executives none accountability no matter what happens next year…….gimme your money and forget. We are now at the point where 2%-3% yield is considered acceptable for a stock investment, I really wonder how “investors” reason…….and at the end who’s the fool? The one who gets the money or the one who gives it? Let them drive the price further down and just wait and see. In the mean time we’ll see how the “spin off” works out, already some analysts are getting a bit of cold feet about the whole proposition.
gazza7899
What happens now if BHP and Rio do stop over supply? Twiggy blinked first so any change will see plenty of regulator scrutiny. Me thinks FMG screwed,can’t increase production ,this will lead to lower price.Can’t lower production because of debt.
Maybe a tad better off than Gina,
LabCityGuy
I work at the Iron Ore Company of Canada and I believe that the end will soon be near for us. Our cost to produce is roughly $77 per tonne. Do the math….ugh
NorthAfricanMiner
BHP’s WAIO operation (they have a specific section about it in the iron ore pages) is really cost effective at around 20$/cash cost (which is the operating result calculated on the EBITDA thus no royalties, no interests (financial costs), no taxes, no depreciation and no freight (~5.3 S/ton) as they reason, correctly, on a benchmark price CF China port.
Their FOB cost ranges around 37-38$/ton, which is achievable by many, the freight to China account only for about 5.3 S/ton, this is where the location advantage plays into the equation. All in all we are in the ball park of 42-43 $/t CIF China, dollar plus, dollar minus. Not a great margin to play with at the current market pricing.
In the FY 2014 (we do not have the 2015 FY results) their cash cost was 27.5$/ton plus Royalties+Taxes (FY2014~ 32%) +Freight (~5.3 $/ton)+Financial Cost+Depreciation. Financial cost are treated at corporate level, not at operation level, so you have to look into another section.
These might not be the exact numbers to the cent but are pretty close.
However the overall Iron Ore section (FY2014) numbers lead to higher calculated values based on the declared EBIT, which means you have to add Interest(I) and Tax (T), likely due to other operation that dilute WAIO achievements.
What is interesting is that FY2014 ended on June 30, 2014 and the average realized ore price was about 122.7 $/ton (CF China), since then the price have gone down considerably and their expectations is that 1$ decrease in iron ore price will impact the net profit by 112 Mil $ (FY 2014 annual report data, page 57), make the math, at 45$/ton (assumed average yearly price), means 122.7-45=77.7 $ x 112 = minus 8.7 Bil $.
I believe they are counting on the averaging of the market at better rates than than 45$/ton sooner than everyone else might think, if the market stabilizes at these rates, is going to be painful no matter what. What the number say for the FY2014 ending June 30, 2014 is that, so far, we have not seen yet the results of the capacity oversupply drive; we will begin to see them on June 30, 2015 (FY2015) and the year after. Chinese domestic producers are a tougher nut to crack than expected (by those that do not fully understand how China social and economics policies work); it will be a game of who can hold their breath longer awaiting for the other to drop dead. I always believed that waging economic war against a country by corporations is not the best course of action, but that’s me.
Due to the way the data are presented it is bit more difficult to determine their RONA trend for the iron ore business (2012;2013;2014 and onward); it would be an interesting exercise to see if and when the efficiency curve could be predicted to go into hysteresis (flattening), that is, they have no more operating efficiency cards into the sleeve.
All the data are available in their Annual Report on line, it’s over 380 pages but well presented and readable. My two cents in the interest of clarity.
Guest
A small correction EBITDA doesn’t include financial costs as well and their declared net cash cost does not include freight as well.
NorthAfricanMiner
On a side note, looking at the broader picture corporate wise, let’s not forget the Oil & Gas unit…….the goodwill declared and the oil price fluctuation assumptions before starting to incur impairments have been already way passed, gas price predictions were not that off.
They are doing an excellent job in managing their financial costs and efficiencies; however maybe they have taken over a bit more than they can chew. The poor WA Government is taking another bit up of expectations for economic growth after the Browse LNG let down.
NorthAfricanMiner
I like the quote of the estimate by Liberum Capital…………they simply have to read the FY2014 Annual Report, no need to estimate.