24 de septiembre de 2014 / 12:07 / en 3 años

RPT-COLUMN-Will the Big 3 iron ore miners have enough time to win price war?: Russell

(Repeats with no changes to text) - Clyde Russell is a Reuters columnist. The views expressed are his own.-

By Clyde Russell

LAUNCESTON, Australia, Sept 24 (Reuters) - The recent debate over iron ore has tended to be whether the three mining giants who dominate seaborne supply will win their massive bet that they can drive high-cost producers out of the market.

But a more relevant question is whether they will have the time to achieve their aims.

The Anglo-Australian pair of Rio Tinto and BHP Billiton, as well as Brazil’s Vale have flooded the market with their low-cost iron ore, with supply from Western Australia ramping up dramatically in the past year.

This has led to a collapse in the Asian spot price .IO62-CNI=SI to a five-year low of $79.40 a tonne on Tuesday, down 41 percent from the end of last year and 58 percent from the record $191.90 a tonne reached in February 2011.

The main question for the big three is not whether they can drive higher-cost competitors to the wall, but how long their own investors will tolerate the lower earnings as a result of the weak iron ore price.

While the chief executives of the big three haven’t exactly said so in public, they are clearly hoping for a relatively short war and a quick victory, after which iron ore prices will once again rise and stabilise at a higher level.

Again, that price level hasn’t been clearly spelt out, but I would imagine the big three have a number in mind somewhere above $90 a tonne, with $110 likely viewed as a ceiling.

The Australian government’s commodity forecaster, the Bureau of Resource and Energy Economics, lowered its 2015 iron ore price forecast to $92.40 a tonne from $94.60 previously, while also lifting its forecast for Australian exports to 735.3 million tonnes in the 2014-15 fiscal year from 720.7 million.

This forecast is broadly in line with several other respected analysts, with the consensus revolving around a return to levels above $90 a tonne by the end of this year or early in 2015 as high-priced supply leaves the market.

If this is the case, Rio Tinto’s Sam Walsh and BHP’s Andrew Mackenzie probably have not too much to worry about.

A scenario in which iron ore prices recover and stabilise around $90 a tonne will allow them to make significant profits, and would justify the billions of dollars they have spent to ramp up supply from their mines in Western Australia.


However, what happens in an alternative scenario, where high-cost supply, particularly Chinese domestic output, doesn’t leave the market as fast as expected.

And to make matters worse, what happens when more low-cost output from mines not operated by the big three also comes on line.

Dealing with the first scenario, it certainly appears that some Chinese domestic output has left the market, but probably not in the volumes that Rio and BHP would like to see.

Official statistics suggest that Chinese iron ore output actually gained 8.5 percent in the first eight months of the year, over the same period in 2013.

This raw figure doesn’t account for the declining grade of Chinese output, but even so, it hardly speaks of a collapse in mine production.

More significantly, the share of imported ore being used by Chinese steel mills has risen, reaching 88 percent this month from 75 percent at the start of the year, according to consultancy MySteel.

That does speak to some replacement of domestic iron ore by imports, but the question remains as to whether this is enough for Rio and BHP.

A large part of China’s iron ore industry is controlled by the large, state-owned steel companies, and as such, is highly unlikely to shut down, even if it does become loss-making.

The top priority for Chinese state companies is generally jobs, and there are numerous examples of unprofitable enterprises continuing to operate for social reasons. Just look at the aluminium sector for an example.

Rio Tinto’s 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.

Those closures have been concentrated in minor producers such as Iran, South Africa and Indonesia, as well as some smaller operators in Australia.

About 132 million new tonnes of supply is expected to come online in 2014, most of it from the big three.

The problem is not so much this year, but in the coming years, with 393 million tonnes of new capacity expected in the next few years, and this just from the top five producers.

It’s likely that this will swamp any increase in demand, meaning that the major, low-cost producers are counting on destroying everybody in the seaborne trade and also shutting down a large chunk of Chinese output.

If all the new capacity is brought to market, it’s increasingly hard to see how the price can rally back to $90 a tonne and stay there.

This creates a problem for Rio Tinto and BHP, who have basically promised investors that they will be returning cash, having imposed cost cuts and slashed capital spending.

BHP said in its latest report that every $1 decline in the iron ore price wipes $135 million off net profit after tax.

It doesn’t take long to work out that BHP, and its competitors, will struggle to deliver enough free cash flow to reward investors if the iron ore price remains depressed for much longer.

The equity investors who led a charge to force the resource giants to stop spending on building new mines in 2012 were licking their lips in anticipation of the rewards of those efforts.

A prolonged iron ore price war will dash those hopes, and shareholders are likely to pressure Rio Tinto and BHP to do more than swamp the market with cheap iron ore.

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

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