13/06/14 – Iron ore hits a 21-month low
Oversupply continues to weigh on the price of iron ore, which has slipped to a 21-month low following a record 1.2 million-tonne single-day shipment of the bulk metal out of Port Hedland last Saturday.
The benchmark iron ore price, measured out of the Tiajin port in China, has been trending down all week and slumped a further 2.1 per cent overnight on Thursday, to $US91.50 a tonne, the lowest level since September 2012.
Iron ore is down 3.2 per cent this week, and 31.8 per cent this year.
Last Saturday, Port Hedland shipped 1.27 million tonnes of iron ore in a single day, using seven capsize vessels, for the first time, to beat the previous, record set in April, by close to 160,000 tonnes.
The big miners are unfazed by the price crash, as they maintain low costs and higher quality grades of iron ore. BHP Billiton’s breakeven sits at $US45 a tonne, while Rio Tinto’s is $US43 a tonne. Vale’s is a little higher at $US75 a tonne because it has to ship further from Brazil to China.
BHP, Rio, and Vale are all chasing record volumes of 217 million tonnes, 295 million tonnes and 360 million tonnes respectively.
“Right now, they wouldn’t be thinking about managing their production into the market,” UBS mining analyst Glyn Lawcock said. “We would estimate, BHP and Rio are still making in the order of $US35-$US40 per tonne margins.”
In Australia, the value of iron ore exports has risen 24 per cent over the past year, even though the iron ore spot price has lost more than 30 per cent.
Single-metal miners such as Fortescue Metals and Atlas Iron face the difficult challenges of a higher cost base and lower quality iron ore, which is sold at a discount to the benchmark price. Fortescue has an all-in cash cost of around $US72 a tonne, while Atlas breaks even at about $US82 a tonne.
The grade and impurity discount between the benchmark 62 per cent iron ore Fe and grades sub-60 per cent has widened over 2014.
“Right now, we would understand if you’re selling some spot tonnes of low quality product, you’re taking the 6 per cent discount, plus potentially anywhere upwards of 15 per cent for impurity discounts,” Mr Lawcock said.
The 15 per cent impurity discount has ballooned from as tight as 2 per cent in the December quarter last year.
“Fortescue is potentially now only making low double digit margins, $US10-$US12,” Mr Lawcock said.
“Back three months ago, when discounts were narrower and prices were higher, those margins were probably close to $US30-$US40. It came in very quick, predicated by the fact that the discount went up and the price came down, so there was a double whammy.”
As the Chinese government implements environmental policies curb inefficient and high-polluting steel producers, demand for lower grade iron ore wanes. The oversupplied market allows iron ore buyers the discretion to pass over product.
For every 1 per cent movement in the grade discount, Fortescue’s pre-tax earnings fall by $100 million, according to Goldman Sachs.
Lower grade iron ore, 57 per cent to 58 per cent Fe, experienced a discount of $US10 a tonne over 2012 and 2013, but Credit Suisse estimates that was abnormally low. The discount is now $US19 a tonne and is expected to hit $US20 a tonne.
“The falling iron ore price has had the effect of reducing China’s domestic production, as Australian producers hoped,” Credit Suisse analyst Matthew Hope said.
“But also reduced demand for 56 per cent to 58 per cent Fe ore because the high-grade concentrate is needed for blending with lower grade ores to produce the right sinter quality.”
Source – The Sydney Morning Herald