23 de octubre de 2014 / 13:12 / hace 3 años

RPT-COLUMN-Iron ore giants win 1st round in global battle but knockout unlikely: Russell

(Repeats story that ran earlier in the day, with no change to text) (Clyde Russell is a Reuters columnist. The views expressed are his own.)

By Clyde Russell

LAUNCESTON, Australia, Oct 23 (Reuters) - There is now no doubt that the big three global iron ore miners are producing record amounts in their bid to dominate the industry. The question remains, what will happen if they succeed?

Anglo-Australian giants Rio Tinto and BHP Billiton both reported record output in their latest quarterly reports, and affirmed they were on track to boost production even further.

Top producer, Brazil's Vale is also increasing output, with Brazilian trade figures showing iron ore exports rose 16.7 percent in September from August to 33 million tonnes.

These figures show that the output side of the plan to dominate global seaborne iron ore trade is going quite well for the big three.

In the case of BHP and Rio Tinto, they are well-placed to continue to put pressure on competitors based in their home turf of Western Australia state, as well as those in other parts of the world. (for a graphic on BHP production, see here)

With the lowest cash costs, in the region between $20 to $30 a tonne, and plans to strip out even more costs, they can survive and prosper even if iron ore prices remain weak.

Vale's costs are believed to be higher than the Australian majors, but the Brazilian miner will also be able to withstand weaker iron ore prices for longer than virtually everybody else, other than BHP and Rio Tinto.

With the production and costs part of the equation working for the big three, how are they doing on the other parts of the plan to dominate global iron ore?

The spot price in Asia .IO62-CNI=SI is down 39 percent so far this year, but at $81.50 a tonne on Wednesday, it has recovered somewhat from the five-year low of $77.50, hit in late September.

This is a price below what Rio Tinto, BHP and Vale would probably like to see over the medium to long term, but it's still a level at which they can book substantial profits.

The problem for the big three is that iron ore supply isn't leaving the market as fast as they would like.

SUPPLY WAVE ARRIVING

Rio Tinto Chief Executive Sam Walsh told Reuters on Sept. 9 that he expects 125 million tonnes of iron ore capacity to leave the market in 2014, with about 85 million tonnes already cut.

That sounds like a substantial amount, but it's dwarfed by the capacity the big three and other major miners plan to add in the next few years.

The big three, plus number four Fortescue Metals Group and new entrant, billionaire Gina Rinehart's Roy Hill mine, will add almost 400 million tonnes of new capacity in the next few years.

This is about double what China currently imports from every other country in the world other than Australia and Brazil.

This means the top five producers will have to displace every tonne of seaborne iron ore from the China market, as well as almost half of China's domestic output, working on a 62 percent iron content basis.

The latest Chinese trade data shows this is unlikely to be an easy task.

While imports from Australia are up 33.5 percent year-to-date to 405.6 million tonnes, and those from Brazil by 13 percent to 125 million tonnes, there are still other countries managing to increase their share of the Chinese market.

South Africa, the No.3 supplier to China, has seen a modest increase in its China exports to 33.3 million tonnes in the first nine months of the year, a gain of 3 percent over the same period in 2013.

Fourth-ranked Sierra Leone has seen its imports into China surge 68.2 percent to 14.58 million tonnes, while fifth-ranked Iran is holding its ground, dropping a mere 0.6 percent to 14.58 million tonnes.

While the Chinese customs data doesn't reflect the quality of ore being received, it's worth noting that the price per tonne of cargoes from Sierra Leone and Iran is substantially below that of both Australia and Brazil.

This suggests that the iron ore price will have further to fall if shipments from these countries are to be pushed out of the Chinese market.

Chinese domestic output is also holding up well, assuming the official statistics can be believed, which is largely doubted by the analyst community.

Nonetheless, the numbers show Chinese iron ore output up 7.2 percent year-to-date at 1.12 billion tonnes, although this doesn't account for the likelihood of further declines in grade of what is already poor quality iron ore.

While there may be debate over the accuracy of the data, taken at face value they don't speak of a collapse in Chinese domestic iron ore output, which the big three need to make their plan work.

WILL SHAREHOLDERS BE REWARDED?

The final part of the plan is presumably to reward long-suffering shareholders once global domination is achieved, when all the additional capacity can be sold, even if the price of iron ore has to stay low enough to keep the vanquished competitors from returning.

This is also where BHP and Rio Tinto may struggle. While their share prices have rallied off the year lows, they are still below the level they started the year at, and well off the post-2008 recession highs of early 2011.

The share prices haven't shown much growth since the lows of 2012, after which the chief executives of both were replaced and the new leaders promised to cut back on capital spending, lower costs and return more to shareholders.

The key test will be whether investors will be rewarded by either higher share prices, or increased dividends.

For this to happen, the big three need to achieve their global iron ore dominance without the price falling too much further, a questionable proposition if they bring all their new capacity to bear on the market.

Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund. (Editing by Muralikumar Anantharaman)

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