More high-cost Chinese iron ore mines to be shut this year as prices tipped to sink further
High-cost iron ore mines in remote parts of the mainland and those owned by state-owned steel mills will come under unprecedented pressure to shut down this year, with iron ore prices tipped to fall further from current decade-low levels.
The closure of uncompetitive mines, which have either been protected by local governments to preserve jobs or shielded them from import competition due to their remoteness, is necessary to balance the over-supplied market.
The 1.2 billion tonne-a-year seaborne iron ore market, with two-thirds of shipments going to the mainland, is expected to see more low-cost supply, as the 55 million tonne-a-year Roy Hill mine is scheduled to come on stream in Austalia late this year, while the 90 million tonne-a-year S11D project in Brazil is expected to be on line next year.
In the long term it is difficult for the Chinese steel industry to subsidise high-cost ore production
As a result, more high-cost supply from the mainland and elsewhere will be squeezed out of the market. Mainland ore imports surged 13.8 per cent last year, even as crude steel output grew just 0.9 per cent. The deputy secretary-general of the China Iron and Steel Association, Li Xinchuang, predicts mainland steel output will fall 1 per cent this year.
Investec Asset Management commodities fund manager George Cheveley, who previously worked as a market analyst at iron ore giant BHP Billiton, said: “We have seen supply come out in China, and in West Africa … but we need more, that means we still need to see more pressure on some of these companies at the higher end [of the cost curve].”
He said the largest producers in Australia and Brazil, which supply the bulk of the seaborne ore, faced little pressure to cut back as they were still profitable at current low prices, given cash production costs – excluding depreciation and other fixed costs – that were below US$20 a tonne in Western Australia.
Iron ore delivered to the Qingdao port traded at HK$47 a tonne on April 2, the lowest since 2005. It has fallen a third since the start of the year and by 60 per cent from a year earlier, to a fraction of the record high of around US$200 in early 2008.
Deutsche Bank says the iron ore price could fall below US$40 a tonne and would need to stay at US$40 to US$45 for a long period to balance the market, as the weak Australian dollar, low oil prices and near record-low freight rates drove down miners’ costs in US dollar terms.
According to the US Geological Survey, Australia has the world’s largest iron ore reserves in terms of iron content, accounting for 21 per cent of the total, followed by Brazil’s 20 per cent, Russia’s 17 per cent and the mainland’s 9 per cent.
But the mainland’s ore content – 31 per cent – is much lower than the other three nation’s 49 to 56 per cent, which means its production costs are much higher.
Cheveley said many high-cost mainland mines had closed last year, but faster than expected production growth overseas, with some 60 million tonnes of the excess from Australia, had more than offset the mainland closures.
He said “captive” mines owned by steel mills, particularly state-owned ones, and those with mines in inland regions where logistics costs were too high for seaborne ore to compete, were more vulnerable this year, although it was hard to tell how many would close because it was hard to predict how far local governments would go to protect jobs.
Neville Power, chief executive Australia’s Fortescue Metals Group, the world’s fourth-largest iron ore producer, told the South China Morning Post late last month that such subsidised operation was not sustainable.
“In the long term it is difficult for the Chinese steel industry to subsidise high-cost ore production,” he said on the sidelines of the Mines and Money conference. “That impinges on their own competitiveness versus steel mills from other places.”
Andrew Driscoll, head of resources research at brokerage CLSA, said some 300 million tonnes of annual, new, low-cost supply expected to come on stream in the next four years.
With annual demand growth of some 40 million tonnes, he said a surplus of 100 million tonnes in the next two years would force more mine closures in China, West Africa and Australia.
Driscoll said more than 40 million tonnes of capacity was closed on the mainland last year, with another 20 to 30 million tonnes expected to close this year. Many of those that have already closed had production costs of US$100 a tonne or more.
“For the first time in over a decade, ore prices are set not by the need to incentivise high-cost, low-grade output from China, but by the need to force enough supply exit to rebalance the [over-supplied] market,” he said.
A proposal from Fortescue chairman Andrew Forrest last month for major miners to cap output was rejected by rivals including mining giant Rio Tinto.
Tad Watroba, executive director of Hancock Prospecting, one of Australia’s largest iron ore miners, told the Post a coordinated supply cut was out of the question.
“The iron ore industry is in a globally competitive market and Australia is just a part of it,” he said. “In a free market, it’s up to each producer to decide how much they will produce. Competition laws in Australia make it illegal to collude to rig pricing in the market. If Australia doesn’t export, someone else will.”
Additional reporting by Benjamin Robertson
