Truck at work in a Western Australia’s iron ore mine.
The world’s largest iron ore producers are moving in the right direction by continuing to increase output even as demand cooled in top consumer China, sending prices tumbling and leaving smaller, high-cost producers struggling to survive.
That seems to be the main conclusion of experts from Goldman Sachs Group, which wrote in a report Wednesday that “efforts to support prices via voluntary production cuts would be counter-productive,” as quoted by Bloomberg.
While such cutbacks are appealing in theory, any such proposal is misguided, according to Goldman’s analyst Christian Lelong.
Brazil’s Vale (NYSE:VALE), BHP Billiton (ASX:BHP) and Rio Tinto (LON:RIO), the report argues, are unlikely to create a cartel and agree on output cuts to stabilize prices, with waning demand expected to increase competition.
“First, production cuts would go against the prevailing trend of improving efficiency,” Lelong wrote. “Second, the required coordination among dominant producers with different incentives would be more difficult to achieve among three companies; successful cartels in oil and potash have featured only one or two dominant producers.”
Glencore (LON:GLEN) chief executive Ivan Glasenberg and Fortescue’s Metals Group (ASX:FMG) boss Andrew Forrest, among several others, have warned that oversupplying markets regardless of demand was damaging the industry’s credibility.
Prices for the steel making material hit $46.70 a tonne in April, the lowest in a decade, though they have picked up since then to around $62 this week.
Goldman expects the iron ore “war of attrition” will continue while prices gradually decline toward its $40 per metric ton forecast by 2017.
Source: MB Iron Ore Index.
5 Comments
PaoloUSA
This chap doesn’t know what is talking about. Assuming cost efficiencies tending to zero………How about profitability? War of attrition against who? China?
Scott
War of attrition against each other. Even at $40/t the largest producers are making near on 100% margins, so their profitability is quite fine. And improving efficiency leads to lower costs and hence higher profitability.
PaoloUSA
At 40$/t they are not making 100% profit, the much ventilated 20$/t cash
cost makes everyone believe that they are making a ton of money even at
40$/t price. I repeat what I wrote a while ago based on the analysis of BHP 2014’s financial statements.
“BHP’s WAIO operation (they have a specific section about it in the iron ore pages) is really cost effective at around a declared (will see the FY2015 results)
20$/ton cash cost (which is the operating result calculated on the EBITDA thus
no royalties, no interests (financial costs), no taxes, no depreciation and no
freight (~5.3 S/ton) as they reason, correctly, on a benchmark price CF China
port.
Their FOB cost ranges around 37-38$/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 costs 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) andTax (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, page57), make the math, at 45$/ton (assumed average yearly price), means
122.7-45=77.7 $ x 112 = minus 8.7 Bil $.”
PaoloUSA
Quote:
“The data are compelling that financial forecasts are typically very inaccurate. But Adam Shell is right when he says they grab our attention. In his book, Your Money and Your Brain, Jason Zweig observes that people hate randomness. As the author says: “The human compulsion to make predictions about the unpredictable originates in the dopamine centers of our reflexive (emotional) brain.” That’s why these predictions grab our attention.
Zweig notes that when presented with almost any data, your investing brain will feel like it knows what’s coming — and it will usually be wrong. The next time you see a prediction, even one with compelling logic, you may want to ratchet down your confidence in that forecast, and ask yourself how much you will lose if that brilliant prognostication is wrong.”
kef long
…. Goldman is perhaps happy with its net short position on Iron Ore and commodities in general …. any supply cuts might lead to a price hike and god forbid losses .. for the US’s bastion of corporate honesty …..