MELBOURNE – The world’s biggest iron ore miners will be able to withstand the expected plunge in prices because their race to cut production costs has dramatically lowered the industry’s margin pressure point, allowing them to keep fueling a cash juggernaut that’s revived the mining sector.
More than 90% of producers in the global seaborne market can generate profits at a benchmark price of $60 a metric ton, Adrian Doyle, a Sydney-based senior consultant at researcher CRU Group, said by phone. That compares with about 65% of suppliers able to avoid losses at the same price point three years ago, he said.
“There have been fantastic cost reductions in a lot of instances,” while producers have also been boosted by lower oil prices, Doyle said. “If we were thinking of a pressure point where we’d start to see a bit of stretching in the industry, previously it would’ve been around $60/t, now it’s closer to $50/t-to-$45/t to stress test everyone but the majors.”
Benchmark iron ore dropped under $90 a metric ton last week for the first time since Feb. 10 amid rising supply in the 1.4 billion ton seaborne market and surging stockpiles in China. Ore with 62% content in Qingdao was at $86.72 a dry ton Friday, according to Metal Bulletin Ltd. Prices rallied to $94.86/t on Feb. 21, the highest since August 2014. Futures in Dalian surged 4.3% to 684.5 yuan/t on Monday, the highest at close since March 3.
Producers including BHP Billiton and Fortescue Metals Group have warned prices are poised to retreat after they reported a surge in profits last month fueled by the price rally and their cost cuts. Perth-based Fortescue has more than halved cash costs in the past two years to about $12.54/t in the last quarter, while BHP lowered them by more than 25% to $15.05/t in the final six months of last year, according to filings.
Prices are likely to move closer to $60/t by the end of this year, Sally Auld, chief economist and head of fixed-income and currency strategy for Australia at JPMorgan Chase & Co., told Bloomberg TV in an interview. They will drop to $56.89/t in the final quarter of 2017, according to the median estimate among 14 analysts surveyed by Bloomberg.
About 14% of global producers lose cash at $60/t, according to Deutsche Bank analysts including Paul Young and Anna Mulholland. At $40, around 31% of the sector are loss-making, they wrote in a March 8 note. With prices at $90/t, only 1% of miners fail to generate profits.
“The fundamentals all point in the direction of a softening of that iron ore price,” BHP’s CFO Peter Beaven said Thursday at a Sydney conference. “Supply continues to increase, particularly from Brazil,” and there’s a waning impact on demand from China’s fiscal stimulus. The third-largest exporter is prepared for a “much lower iron ore price.”
Brazil’s Vale SA, the biggest exporter, is delivering its first cargoes to China from its $14-billion S11D mine and has cash costs that are likely to fall below $10/t, according to Australia’s Department of Industry, Innovation and Science. Rival producers including Rio Tinto Group, BHP, Fortescue and Roy Hill Holdings would all remain profitable at prices below $50/t, the department said in a report published in January.