Iron ore’s price plunges among new expansions
IRON ORE’S tumble into the $30s threatens the world’s biggest miners as prices approach break-even costs, according to Capital Economics.
BHP Billiton shares slumped to the lowest in 10 years and Rio Tinto dropped to the lowest since 2009.
The most expensive operations at the four largest suppliers were on the verge of making losses at rates below $40 (R577) a ton, said John Kovacs, a senior commodities economist at Capital Economics in London, who estimated their break-even levels at $28 to $39, taking into account freight and other costs.
Constrained
While these producers would keep output strong, they would be constrained by low prices, he said on Monday.
Iron ore’s plunge below $40 comes as producers including Vale in Brazil and Rio and BHP in Australia press on with expansions to cut costs and defend market share, just as demand from the largest consumer China slows.
They are the world’s biggest suppliers, along with Fortescue Metals Group. Prices of the raw material have lost 45 percent this year and have plunged 80 percent from their peak in 2011.
“The big four will find it hard to maintain output at below $40,” Kovacs said in response to questions. “If prices remain weak, output from the highest-cost mines of the big four will be under pressure.”
Ore with 62 percent content delivered to Qingdao sank 1.1 percent to $38.65 a ton on Monday, a record low in daily prices compiled by Metal Bulletin, dating back to May 2009. The raw material peaked at $191.70 in 2011.
Kovacs said that while rates would stay low over the next year, he did not believe they would remain below $40 for a significant length of time. He expected prices to recover slowly because demand would not fall much further and the biggest miners would find it difficult to keep up output at these levels.
Mining company shares retreated. BHP declined 5.2 percent to A$17.05 (R179.68) in Sydney, the lowest since 2005. Rio dropped 4.3 percent to the lowest in more than six years and Fortescue closed 3 percent lower. Top producer Vale closed at an 11-year low in São Paulo on Monday.
UBS Group estimates that of the four biggest producers, Fortescue has the highest break-even cost of $40 and Vale’s is $34 in terms of ore landed in China with 62 percent content including interest. BHP’s breakeven level is $29 and Rio’s $30, the bank’s data show.
“There is not much production outside of the big four that can make money at these levels – eventually, we should see the juniors be forced to cut production,” said Jeremy Sussman, a New York-based analyst at Clarksons Platou Securities. – Bloomberg