Iron ore price output caps called ‘hare brained’
A halfhearted attempt at a rally after falling to fresh six-year lows on Monday petered out on Thursday with the price of 62% Fe at the Chinese port of Tianjin skidding $0.70 or 1.3% to $54.80 a tonne.
After losing 47% in value in 2014, the price of iron ore is down another 30% this year. The SteelIndex, a unit of Platts, first started tracking the spot price in November 2008. In 2008, the benchmark contract price was $60.80 a tonne, which was hiked from the annually-set price in 2007 of $36.63.
An indication of just how depressed the market for the steelmaking raw material has become came yesterday when global number four producer Fortescue Metals (ASX:FMG) chairman Andrew “Twiggy” Forrest challenged Rio Tinto (ASX:RIO), BHP Billiton (ASX:BHP), and Vale (NYSE:VALE) to band together to cap output.
On Thursday Rio’s chief executive Sam Walsh called Twiggy’s plan “hare brained” and told a mining conference to “artificially prop up” the price is “physically just not going to work,” reports the FT.
Walsh who used to head up the miners iron ore division is known for being a straight talker.
In December Walsh gave a wide-ranging interview to an Australian paper and in between talk about everything from milk jugs to Christian ethics in mining to opera and Glencore’s bid managed to slip in that “one day it [his first years as CEO) will be a Harvard case study because it really is an amazing turnaround.”
A bigger concern than making an agreement on production limits workable is probably the fact that anti-trust behaviour of this kind will certainly land the miners in trouble with regulators and open them up to lawsuits from customers.
While a slowing economy in China which imports more than 70% of the world’s iron ore can take some blame, the main reason for the slump is a flood of new supply.
Led by the Big 3, iron ore miners invested north of $100 billion in new projects and expansions since the start of the decade which pushed the market into surplus mid-2014.
This year Australia alone is set to dump an additional 48 million tonnes on the market pushing exports to 766 million – more than double the country’s output just three years ago.
Rio Tinto is well on its way to reach 360 million tonnes in the next few years. BHP Billiton’ is on target to grow capacity to 290 million tonnes per year by mid-2017.
Unlisted miner Hancock Prospecting’s Roy Hill could start shipping 55-million tonnes-a-year as early as September 2015, while Fortescue Metals have hit targeted production of 155 million tonnes per year right on time.
Marine Corps reservist Bob “Captain Kangaroo” Keeshan, 1942 with pet Kangaroo, via One.Big.Photo
More News
{{ commodity.name }}
{{ post.title }}
{{ post.date }}
3 Comments
Peter Browne
The only price manipulation permitted is the one whereby the Chinese flood the market with capital and create oversupply of raw commodities such as iron ore, driving the price down for miners and reducing the value to host countries – all in China’s favour
Ferris
If I can draw a comparison – The worlds car makers could quite easily produce double the number of cars, however, if they did, they would very quickly find themselves going broke. They of course understand this and they don’t. The iron ore producers are going to have to introduce some form of production discipline.
The Chinese market appears to have leveled off somewhat and cannot be expected to continue to increase as like all countries they will have a long term demand that will platform. In fact it could very well be that they are around this level now.
The iron ore producers have had their foot to the pedal for some years and they have reached a point where they are going to have to back off. Do they know how?
Another point. These guys are digging up a lot of Australian national assets and shipping them overseas. Are we getting a fair return?
NorthAfricanMiner
When you slip the carpet under the feet of you major customer (….we will drive the Chinese domestic producers out of business……..) and then rely on it for about 80% of you export, you should expect some retributions soon or later. Shifting the blame on Chinese stagnant economy is just food for investors, China will grow at about 7-8% year steadily for at least the next decade that’s more than Europe all together and many other countries and the biggies know that.
The strategy is flawed and is going to backfire in the middle term. Produce more at minimal margins or produce less at way better margins? By the way I wonder why BHP huge cost efficiency exercise was not started before ” in the best interest of investors’ return”, quite a strategy, we drive the price down and we start optimizing costs.
By throwing overcapacity on the market, they have taken away that reasonable buffer in the market price that would prevent them skating on thin ice on the boundary between profit and loss. Price cap is “fixing”? What are biggies trying to do? Charity to the steel industry? Driving everyone else out of business and control the market later how the regulators call this? Of course once they achieve that they will keep the iron ore price down to 45-50$/ton…..maybe yes, maybe no, who knows, however this is not fixing…… Not to mention the new political trend of the Aussie government to gravitate into uncle Sam orbit with the usual consequences of starting to reason in terms of “friends” and “foes”, again we are expecting our “foes” to go along……..carrot in the right hand and stick in the left. “Hare brained” to propose a market cap? Is the only sensible things we’ve heard in long time from the big buck CEO’s. The usual food for investors, it reminds me of the “masterpiece” of James Point Price 40MMTpa LNG…….overpaid top management incompetence at the its best.
PS: the Chinese don’t flood the market with capital to create oversupply, they are building “alternative” supplies sources to their domestic production in which they have control, while in the process, enjoying the benefits of some other producers stupidity……..just in case the biggies later on, without declaring it, start fixing the price once they have wiped of the competition.