The collapse in global iron ore prices isn’t chasing Gina Rinehart away from the red soil of Western Australia that made her a billionaire. Like producers in Brazil and some in China, she can still profit from the metal.
At the $8 billion Roy Hill mine Rinehart is building in the Pilbara region, where her father made the first discoveries in the 1950s, ore must sell for about $56 a metric ton at Chinese ports to avoid losses, and costs are even lower for Australian output from Rio Tinto Group and BHP Billiton Ltd., UBS Group AG data show. Even with prices down 65% from a record in 2011, top buyer China pays $67 for the steel-making ore today.
While some high-cost operations have closed and demand is slowing, there are enough producers making money to extend a global surplus for another four years, after companies spent about $120 billion since 2011 to expand mines, according to Goldman Sachs Group Inc. More than 80% of global production is still profitable, Bloomberg Intelligence says.
“We did base this project on long-run iron ore prices, which admittedly were higher than what they are today,” Barry Fitzgerald, the chief executive officer of Rinehart’s Roy Hill Holdings Pty, told reporters during a tour of the site last month. “There’s going to be an awful lot of impact on the rest of the industry” before Roy Hill is affected, he said.
The iron ore glut emerged this year after a record expansion of mine capacity and as China, the world’s second- largest economy, grew at the slowest pace in two decades. The surplus will reach 300 million tons by 2017, because Chinese steel production is unlikely to expand fast enough to absorb the excess supply, Goldman Sachs said in a Nov. 6 report.
Rising output of low-cost ore will boost shipments from Australia, the largest producer, said Wayne Calder, deputy executive director of the government’s Bureau of Resources and Energy Economics. Supply from Rio, BHP, Fortescue Metals Group Ltd. and Roy Hill will add about 100 million tons a year to exports, Calder said in September. Rinehart, the richest woman in the Asia-Pacific region, is pushing ahead with plans to start shipments by September and produce 55 million tons a year.
Ore with 62% content delivered to Qingdao, China, plunged 50% this year to $66.84 on Dec. 23, the lowest in more than five years, according to Metal Bulletin Ltd., and the raw material was at $66.94 on Dec. 24. Even as prices drop, high-cost output may be slow to shutter. Some mines in China will attempt to “hang on” above $60 to $70, Bank of America Merrill Lynch said, to preserve jobs. A drop below $60 next year is needed to accelerate cuts, Citigroup Inc. says.
Supplies are already being reduced, including by Cliffs Natural Resources Inc., the biggest U.S. iron ore producer, MMX Mineracao e Metalicos SA in Brazil, and Australia’s Western Desert Resources Ltd. The Bloomberg Intelligence analysis showed 22 projects canceled or suspended since July.
In China, 200,000 tons of capacity in Dandong, Liaoning, was closed in October by owner Shen Bin, who said the private company couldn’t afford to keep paying for fuel, explosives and transportation with its cost of production at $85 a ton.
Chinese output will drop 15% this year to 339 million tons from 400 million in 2013, before sliding to 236 million in 2015, HSBC Holdings Plc said in a report on Oct. 22.
While half of the mines in China aren’t profitable and should be shut, many will remain in operation, said Liang Ruian, a fund manager at Shanghai-based Jianfeng Asset Management. The Bloomberg Intelligence analysis showed Chinese producers were aided by the drop in energy prices this year and government reductions in taxes and tariffs on mining companies.
With prices at $70 to $80, there would be cuts in high-cost supplies from China as well as possible reductions in Canada, Brazil, Iran, Malaysia and the U.S., Ivan Szpakowski, a Citigroup analyst, said on Nov. 11. A sustained period of $60 to $70 would spread cutbacks to West Africa and Russia, as well as more projects in Australia, Brazil and Iran, he said.
“There’s still obviously sufficient room for us to be there with the current price,” Roy Hill’s Fitzgerald said at the Pilbara mine. “We would see ourselves being in a good position to ramp up.”
Copyright 2014 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.