Many of the nation’s top iron ore producers are getting dangerously close to the break even mark as a 34 per cent drop in the price of iron ore this year hurts profitability and threatens the strength of the nation’s mining industry.
Adding to worries about profits, is the fact that the average rate of discounting applied to lower grade has increased to its highest level since 2010, experts say, as mining companies try to attract buyers.
There is also concern that the price jump, if sustained, will have a negative impact on the West Australian budget with each $US1 per tonne decrease in iron ore prices resulting in WA mining royalties falling by $45 million. A higher Australian dollar will only add to the pressure and is likely to mean even less money going back to the state government.
The iron ore price dropped to $US89 a tonne on Tuesday - its lowest level since September 2012 - as concerns about too much supply sitting at Chinese ports weighed on the minds of investors. It rose 0.3% overnight to be currently trading at $US89.30 a tonne.
Credit Suisse head of Australian equity sales Chris Mayne said that most iron ore producers are now very close to breaking even and “struggling to be profitable” given the spot price is near the estimated range used by many miners to calculate their profits.
“Most iron ore producers are break even around $US70-$US80 a tonne.. although the headline price is currently $US89 a tonne, the discount for lower grade ore has gone from a few dollars early this year to now around $US16 and thus many of the iron ore producers are now very close to break even.”
Lower grade ore (57 per cent the quality of premium ore) is currently trading at a $US16 discount to 61 per cent which is the first time since 2010 that the discount has been this big,” Mr Mayne added.
Fairfax Media is also reporting that industry consulting group Steel Home said Fortescue Metals Group was offering a discount of 14 per cent for its lowest grade product from July 1. This is up from 12 per cent in June and an average discount of about 2 per cent last year.
Earlier this year, Fortescue chief executive Neville Power moved to reassure investors in Hong Kong about the risks of falling iron ore prices on the company’s profitability, and the threat posed by increased mining rivals in China, who produce mostly lower and cheaper grade ore.
Analysts say that Fortescue Metal’s break even price for iron ore is around $US75 a tonne, which is similar to that of BHP Billiton and Rio Tinto. Smaller iron ore miner Atlas Iron has a break even level of around $US80 a tonne.
The discount being applied to lower grades is a result of more lower grade ore being produced and too much of the good stuff sitting at Chinese ports.
“BHP/RIO now produce circa 30-40 per cent of 57 per cent grade ore due to their ramp up in production as opposed to the perception that they only produce 61 per cent grade ore, combined with Fortescue’s increased production,” said Mr Mayne.
“The heavy discounting is partly a reflection greater supply of lower grade ore and combined with lower supply of Chinese high grade ore to blend, which has caused the discount to revert back to what was seen prior to 2010 which is 10-20 per cent discount to 61 per cent grade ore rather than close to parity that the market has been used to over the last two years.”
Source: The Sydney Morning Herald
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