Iron ore price drop near record low ‘self imposed’

The market’s wrecked

The price of iron ore fell to within shouting distance of all-time lows on Wednesday as worries about oversupply continue to dog the market and steel prices in top consumer China fall to record lows.

On Wednesday the benchmark 62% Fe import price including freight and insurance at the Chinese port of Tianjin slid 0.8% to $48.30 a tonne, the lowest since July 8 and down 7.6% in a month. Today’s peg is also the second lowest on record since The SteelIndex began tracking the spot price in November 2008. Iron ore traded at $44.10 a tonne on July 8 this year, before bouncing back the next day.

China forges 46% of the world’s steel and consumes for more than 75% of the world’s seaborne iron ore trade, but years of overproduction and unprofitability at the country’s giant state-owned mills have seen steel prices drop to record lows. Shanghai rebar prices dropped to a record low on Wednesday with the most active May futures contract exchanging hands for 1,774 yuan or just under $280 a tonne.

While a slowdown in China can take some of the blame, a flood of new supply is the main factor behind the decline from record highs above $190 a tonne hit in February 2011.

The big three producers – Vale, Rio Tinto and BHP Billiton – have been following a scorched earth policy of raising output and slashing costs to weather low prices and push out competitors.

But the strategy has come in for severe criticism with Australian politicians and competitors even going so far as to suggest an anti-trust investigation should be launched into the Rio and BHP.

On Wednesday the CEO of struggling North American producer Cliffs Resources became the latest to heap scorn on the strategy of the Australian giants.

Lourenco Goncalves told Bloomberg in a phone interview from the company’s headquarters in Cleveland, Ohio that the majors are living in “an imaginary world”:

“The cost-cutting is not even close to offset their loss in revenues. My entire point: the loss in revenue, totally avoidable. Self-imposed. Self-inflicted.

“In their imaginary world, 60 million tons of capacity will go offline this year, then another 125 million tons of capacity will go out of commission next year.

“That’s not the case. Everyone is driving down costs, everyone is trying to continue to cope. You’re not seeing any meaningful number of tons going offline.”

Goncalves took the helm at the 34 million tonnes per year miner, the largest in North American, in 2014 after shareholders staged a boardroom coup. Cliffs (NYSE:CLF), worth $474 million on the New York Stock Exchange on Wednesday, is a shadow of its former self with the stock down 97% from its peak in 2011.

Last month week top producer Vale announced record third quarter shipments of 88 million tonnes despite idling 13 million tonnes worth of high cost operations. More astonishing is the fact that the Rio de Janeiro-based company was able to reduce cash costs to just $12.70 per tonne (it’s in the high teens at Rio Tinto and BHP).

Vale is not stopping there, its 90 million tonnes per year S11D expansion in the Amazon is 75% complete and according to the company that could push costs below $10 a tonne.

After a near 15% year-on-year surge in output in the third quarter Rio is well on its way to reach 360 million tonnes in the next few years, while BHP Billiton which grew production 6% last quarter is on target to grow capacity to 290 million tonnes per year some time during 2017. World number four producer Fortescue Metals added 5% to its targeted output hitting a rate 165 million tonnes per year in July.

Unlisted miner Hancock Prospecting’s Roy Hill is on the verge of shipping its first ore from its Pilbara mine which has a 55-million tonnes-a-year capacity. That would place it within shouting distance of Anglo American which is predicting 53 million tonnes for this year before its Minas Rio mine ramps up to capacity of 26 million tonnes in 2016–2017.

Iron ore price: You got lump?

Source: SGX

Image of roadside dump truck wreck between Mount Augustus and Tom Price by Robyn Jay

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