The world’s biggest iron ore producers are targeting record shipments as lower output costs offset plunging prices and less competitive mines in China are shut.
Vale, Rio Tinto Group, BHP Billiton and Fortescue Metals Group are still making money even after prices of the steel making ingredient dropped 37% since December to the lowest level since 2009. They are betting that higher-cost producers will be squeezed out of the market.
Slowing steel demand in China, which buys 67% of seaborne iron ore supply and new production capacity in Australia and Brazil have led to a global surplus that Goldman Sachs Group forecasts will more than double to 175 million tonnes next year.
According to CLSA, a broker and investment group, as mines in China close, the four companies will boost their share of the seaborne supply to almost 70%.
Mr Daniel Kang an analyst at JPMorgan Chase & Company said that “You’ve got the four major producers with very strong, world class, lowest cost production. Even at current prices or lower, the economics of their expansion projects are very compelling.”
Ore with 62% iron content delivered to the Chinese port of Qingdao declined to USD 85.24 per tonne, the lowest since October 2009. Prices are 56% below a record USD 191.70 in February 2011.
According to UBS AG estimates, Rio Tinto has the lowest break ven cost at USD 42, BHP’s is USD 51 and Vale is at USD 60 in terms of ore landed in China with 62% content.
Rio Tinto, the top supplier after Vale, plans to boost output to more than 330 million tonnes next year after an 11% advance to 295 million tonnes this year.
Vale will raise production by 8.4% to 348 million tonnes next year. BHP sees an 8.9% increase from its Western Australian mines in the year from July 1, while Fortescue may boost shipments by 25%.
Mr Ken Brinsden MD of Atlas said that company with a break even cost in the mid to lower AUD 80s per tonne predicts an increase of at least 12% in exports from its mines in the mineral rich Pilbara region in the year from July 1. While profit margins were being squeezed, higher cost companies would have to cut output first. Atlas would seek to create more head room over time by cutting expenditure.
Mr Nev Power CEO of Fortescue said that “We are very comfortable at these prices, but we do expect to see prices drifting up as the higher-cost production exits the market.”
Goldman Sachs forecast iron ore dropping as low as USD 75 next year, 12% below levels now, and averaging USD 80 over the year. The median of 13 bank forecasts compiled by Bloomberg is for USD 96 down from USD 105 this year.
Mr Christian Lelong, a Goldman analyst in Sydney who worked at BHP for seven years said that “We’ve been the most bearish for a long time. Seaborne supply is very strong. Consumption of iron ore is not growing as strongly. You have too much iron ore, which means prices drop.”
Source – Bloomberg
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