Someone needs to go broke in the Australian iron ore industry, says analyst
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Version 0 of 1. The Australian iron ore industry is poised for a huge shake-up as the global glut worsens and margins continue to tighten. The nation’s biggest iron ore miners, Rio Tinto and BHP Billiton, are still making money and expanding production, but questions remain about the viability of their heavily indebted rivals Fortescue Metals Group and Gina Rinehart’s Roy Hill project. Iron ore is trading at a six-year low of around $US55 per tonne amid weaker Chinese demand. The price slump this week prompted Fortescue Metal’s chairman Andrew “Twiggy” Forrest to call for a cap on iron ore production which was promptly dismissed by Rinehart and the head of Rio Tinto Sam Walsh. But the price outlook remains bleak, with an extra 200m tonnes of the steel-making ingredient expected to be dumped on the market over the next few years. Morningstar analyst Matthew Hodge says higher cost miners like Fortescue and Roy Hill will soon be “running to stand still”. “There has to be some rationalisation,” Hodge said. “Someone needs to go broke, or some miners need to merge production because what’s happening at the moment is unsustainable. “Things are bad and there’s no real sign they’re going to get any better soon, unless there’s a bit more enthusiasm around forming a cartel.” Fortescue has just finished a huge expansion program and Rio Tinto plans to expand by another 50m tonnes while Roy Hill will begin ramping up to 55m tonnes in September. Lurking in the background is Brazilian giant Vale which is planning a $20bn investment to expand production by another 90m tonnes by 2018. In this environment, small to mid-tier Pilbara iron ore producers are being squeezed hard, forced to continually cut costs to stay afloat despite government assistance. BC Iron this week signed a new mining contract to lower costs but its margins remain wafer thin. Of the big players, Hodge said BHP was the most circumspect while Rio and Vale seemed intent on increasing market share. “Vale’s move seems bizarre,” Hodge said. \As the highest cost major iron ore producer with $11bn of debt, Fortescue was in a more precarious position than other Pilbara producers, he said. “Companies that are higher up the cost curve, with lower margins are most at risk.” He said Rio, BHP and Chinese state-owned players had the capacity to take over struggling iron ore companies. Meanwhile, Colin Barnett, the Western Australia premier, said there had been an over-reaction to Forrest’s idea to cap production. “If you flood the market, you hurt yourself, you hurt the smaller companies, you certainly hurt your shareholders, and I think the iron ore industry should be supplying to meet the market,” Barnett said. “That’s not a cartel or predatory pricing.” |