BHP Billiton and Fortescue's Cost Curves Skew Iron Ore Forecast

We wrote recently about the iron ore market and mentioned the cost support believed to be providing a floor to prices in the Asian seaborne market.

But a recent analysis by Standard Bank on the true cost of production throws doubt on how accurate estimates of the Chinese cost curve have been.

The bank, in a note to investors, reviews two recent estimates of the industry’s cost curves made by Fortescue Mining Group (FMG) and BHP Billiton (BHP) in publications this month.

FMG is said to forecast Fe 62% iron ore prices remaining above $120/ton into the long term, while BHP forecasts Fe 62% prices will fall to around $85/ton.

As the bank points out, this $35/ton differential is often the “make or break” for the profitability of many hopeful new iron ore projects, particularly those trying to build Greenfield facilities, with complicated Fe processing and upgrading of engineering facilities or for those dealing with lower Fe grades below 58% or those shipping across large distances.

The huge difference in estimates also throws doubt on the point at which domestic producers can no longer compete with imports and hence provide a sizeable proportion of the supply. One may ask why two major mining firms should have such diverse estimates.

Fortunately Standard Bank provides an explanation, saying the difference is due to an issue of interpretation – firstly, in how many tons of Chinese iron ore production are considered high-cost, and secondly, on what cost range to apply.

Continued in Part Two.

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