According to Reuters, by 2015 major producers Vale in Brazil and Tinto and BHP Billiton in Australia will account for 1.15 billion tons or 83% of the world seaborne iron ore trade, quoting Australian government data, up from 71% just three years earlier. BHP expects to produce 245 million tons this year, up 9% on last year and well ahead of expectations. Rio Tinto is boosting output 9% to 290 million tons this year, with talk of a possible rise to 360 million tons in the cards. Whilst Vale is aiming for 312 million tons and produced a record amount in the second quarter through June 30.
The majors’ approach seems to be that prices may be falling but profitability can be maintained by economies of scale. As a result, smaller mines that do not enjoy the same economies of scale are struggling. Reuters points to exports from Iran – the world’s eighth-biggest supplier on the seaborne market – which fell by a third in June from a year ago to just 1.2 million tons and in Australia, Cairn Hill which started in 2010 and produces just 1.7 million tons per annum. Cairn Hill was put into administration when prices of $104 per ton fell below costs.
Chinese mills have arguably been the biggest losers. Last year those with higher iron purity seemed to be hanging on as steelmakers favored ore that could be used without sintering, but Reuters estimates that at today’s prices some 200 million tons of Chinese domestic production alone is unprofitable and Chinese steel mills use of domestic iron ore was down 40 million tons in Q4 last year.
Unfortunately for smaller miners HSBC is not forecasting a turnaround in price anytime soon, their prediction for 2015 is an average of $105 per ton and for 2016/17 $100 per ton as supply surges on top of 2.8% this year to over 5% per annum in 2015 and 2016
As this graph from HSBC shows the majors are over taking the minors in driving growth in the second half of this decade even as analysts downgrade steel growth. In HSBC’s case from 2.7% to 2.5% this year and over the longer term 2012-2017 CAGR to 2.7% from 2.9%. Chinese steel demand is seen as maturing and once the current mini stimulus tails off next year the steel market may well slip back into over supply again. The good news for steel makers is iron ore costs are likely to remain depressed with spot prices at or even below $100/ton for the next few years. The knock on effect will be to reduce price inflation downstream even for customers whose steel is sourced from mills not reliant on the seaborne market, spot prices are increasingly becoming a global benchmark.