 "Bleak iron ore outlook as steel production and demand shrink")
Should they, or shouldn't they, join forces to restrict global supply of iron ore to boost prices, which fell 60 per cent in the past 12 months? Ore for immediate delivery at China's Tianjin port sank to $46.70 a tonne on April 2, the lowest since 2004-05. In an environment when ore outlook is looking increasingly opaque with some forecasters not ruling out prices plunging to $30 levels, Andrew Forrest, chairman of the world's fourth largest iron ore miner Fortescue Metals, recommended 'capping' of production by leading groups. Forrest certainly did not think his saying: "I'm absolutely happy to cap my production right now... In fact, all of us should cap our production now and we'll find iron ore price will go straight back up to $70, $80 and $90," would lead Australian competition watchdog to deplore his "attempts to engage in cartel conduct".
Not only did the Fortescue chairman get a reprimand from Australian Competition and Consumer Commission, he was also roundly criticised by officials of other large mining groups. Rio Tinto CEO Sam Walsh finds the proposal to wind back production to support ore prices at elevated levels as 'harebrained'. What, however, comes as some consolation for Forrest is the observation of a Morgan Stanley analyst that "He probably does speak the truth. In our view, big miners can influence prices, if they could somehow legally act together to restrict supply growth." The world's four largest producers - Vale, Rio, BHP Billiton and Fotescue - control 70 per cent of global seaborne iron ore trade. Therefore, any moves by the groups in concert that might be perceived as attempts to jack up prices will fall foul of regulatory bodies in different countries.
Besides regulatory concerns, major producers are not ready to cut production for better unit realisation as that would provide props to high cost mines to go on raising ore. As big miners remain focused on increasing production to lower production cost, ore supply is staying much in excess of the demand making prices unprofitable for a growing number of small miners. According to Goldman Sachs, at least half the world's so-called 'tier-two' iron ore producers remain at the risk of closure. Ore market is likely to remain weak for the long haul under supply pressure. At what price point will the four industry leaders start getting seriously hurt? Certainly not at the current level of around $50 a tonne nor at $40 a tonne. Their mining and delivery efficiency has come to a level that at most sites, all costs are more than covered even at $30 a tonne.
Global steel production in the first quarter of 2015 slid 1.8 per cent to 400 mt, thanks to 1.7 per cent fall in Chinese output to 200 mt. China is growing at the slowest pace since 1990 and its steel demand this year and the next will shrink for the first time post 1995. The World Bank has painted a grim picture for iron ore saying "more new low cost capacity is coming online in the next two years."
R K Sharma, director-general, Federation of Indian Mineral Industries, says: "Today's problem has its genesis in pre world financial crisis days when global miners overestimated China's future appetite for iron ore. But then who didn't?"
The big four committed billions of dollar in new capacity development in anticipation of China becoming a one-billion tonne steel producer.
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Not only did the Fortescue chairman get a reprimand from Australian Competition and Consumer Commission, he was also roundly criticised by officials of other large mining groups. Rio Tinto CEO Sam Walsh finds the proposal to wind back production to support ore prices at elevated levels as 'harebrained'. What, however, comes as some consolation for Forrest is the observation of a Morgan Stanley analyst that "He probably does speak the truth. In our view, big miners can influence prices, if they could somehow legally act together to restrict supply growth." The world's four largest producers - Vale, Rio, BHP Billiton and Fotescue - control 70 per cent of global seaborne iron ore trade. Therefore, any moves by the groups in concert that might be perceived as attempts to jack up prices will fall foul of regulatory bodies in different countries.
Besides regulatory concerns, major producers are not ready to cut production for better unit realisation as that would provide props to high cost mines to go on raising ore. As big miners remain focused on increasing production to lower production cost, ore supply is staying much in excess of the demand making prices unprofitable for a growing number of small miners. According to Goldman Sachs, at least half the world's so-called 'tier-two' iron ore producers remain at the risk of closure. Ore market is likely to remain weak for the long haul under supply pressure. At what price point will the four industry leaders start getting seriously hurt? Certainly not at the current level of around $50 a tonne nor at $40 a tonne. Their mining and delivery efficiency has come to a level that at most sites, all costs are more than covered even at $30 a tonne.
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BHP CEO Andrew Mackenzie saying "in iron ore, our focus remains on producing at lowest possible cost with Western Australia iron ore unit cost now below $20 a tonne as we continue to improve productivity" is seen as a commentary on the resilience of top players to ride out the crisis, which is not to end soon. Their margins are heavily squeezed, but industry leaders are stepping up production to small groups' disadvantage. BHP is to lift ore output by two per cent to 250 million tonnes (mt) in 2015. In the last quarter, Vale production was up 4.5 per cent to 77.4 mt and Rio's 12 per cent to 74.7 mt. China, which buys nearly two-thirds of ore transported by sea is to support its high cost iron ore miners with subsidy to avoid further closures. All this is putting extra pressure on ore prices when demand from the steel industry is falling.
Global steel production in the first quarter of 2015 slid 1.8 per cent to 400 mt, thanks to 1.7 per cent fall in Chinese output to 200 mt. China is growing at the slowest pace since 1990 and its steel demand this year and the next will shrink for the first time post 1995. The World Bank has painted a grim picture for iron ore saying "more new low cost capacity is coming online in the next two years."
R K Sharma, director-general, Federation of Indian Mineral Industries, says: "Today's problem has its genesis in pre world financial crisis days when global miners overestimated China's future appetite for iron ore. But then who didn't?"
The big four committed billions of dollar in new capacity development in anticipation of China becoming a one-billion tonne steel producer.