Australia’s big three miners to regain control of iron ore sector

Australia’s big three miners to regain control of iron ore sector

Australia’s top three mining companies — BHP Billiton, Rio Tinto and Fortescue Metals — should regain control of the iron ore sector over the next few years as higher cost producers fall victim to lower commodity prices.

In an interview with Financial Times (subs. required) Aussie billionaire Andrew Forrest, who made his fortune as the driving force behind iron ore miner Fortescue Metals Group (ASX: FMG), said big miners’ low operating costs are pushing higher-cost competitors out of the market.

“We are seeing more substitution take place from China and India as competitors switch off production,” Fortescue’s founder and chairman told FT.

Prices for iron ore, Australia’s major export, have tumbled as a consequence of an ongoing oversupply. The commodity has fallen from roughly $135 a tonne last year to below $90 a tonne last month, for the first time in nearly two years. And while the steel making material has recovered slightly since that low (now trading at $95.90), many are suffering the consequences.

Last week Labrador Iron Mines Holdings halted production at its Canadian mines due to falling prices, while IMX Resources recently closed down its Cairn Hill iron ore mine in South Australia.

Eyes on China

Australia’s three main miners, whose profits from iron ore far exceed those derived from copper and other commodities, have spent tens of billions of dollars over the past decade expanding mines, railways and ports in the Pilbara expecting to cash in on surging demand from China.

Rio Tinto (ASX:RIO), for instance, is increasing its output from its Australian mines by 20% (350 million tonnes) within two years.

BHP (ASX:BHP) announced last week it was planning to rise its iron ore supply and so push higher-cost Chinese competitors out of the market.

Together with Fortescue, Rio and BHP are targeting an additional 170 million tonnes in Australia in 2014.

Image of Rio Tinto's Mount Tom Price mine in the Pilbara from Wikimedia Commons.