Iron Ore Price, page-1922

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Iron Ore
Andrew Forrest and Nev Power are determined (they tell me) to make Fortescue the world's lowest-cost producer of iron ore. They have no choice really: Fortescue is in the extremely uncomfortable position of being caught in the crossfire of BHP Billiton and Rio Tinto's attempt to shut down the Chinese iron ore industry.

Whether this plan by the big two miners is a good idea or not, and whether it will work, is beside the point. It's happening. Get used to it. So that plan from CEO Nev Power to slash costs is a little bit encouraging, at least, for those who have been riding Fortescue down with Andrew (from $6 to less than $2 in a year). He and Nev are not in denial, which is something I guess, although they continue to insist that BHP and Rio are either stupid or colluding, or both, which may be true or not, but it doesn't matter.

Fortescue and other higher-cost iron ore miners are fighting for survival under the output onslaught from BHP and Rio. Forrest says his balance sheet is OK, and he doesn't have any debt repayments due any time soon - the problem is the cost base, which he's now going to deal with. Fortescue's cost per tonne must fall to $35 and he tells me Nev can do that. Good.

As for what's going on in the market, the chart below shows that when the iron ore price fell in 2008, BHP, Rio and Vale cut production; when it fell more steadily from June 2011, Vale held production and BHP and Rio increased it.



Here's another view, focusing only on the Australian producers, including Fortescue and the other smaller ones:



They are mainly going after the Chinese underground (therefore high-cost) miners, but the disappearance of Fortescue from the market would presumably be perfectly OK with them as well.

Here's the global iron ore cost curve:



That graph's a bit old now - the current price is not $US63, of course, it's $US48. According to that chart, FMG is already underwater, although Andrew and Nev dispute that cost figure, saying their all-in costs are $US42 per tonne. The cut to $US35 requires $US7, or 17 per cent, off the costs - no easy task.

Some of those Chinese producers are apparently still producing iron ore for $US130 a tonne, would you believe, and virtually the entire industry in China is now losing money.

The burning question is: how long can they all keep going? Andrew and Nev reckon it's basically forever because the Chinese Government is letting them off taxes and other charges. They might even be giving them straight subsidies - you just wouldn't know.

I think it's a fair bet they can keep going for quite a while, in which case any thought that iron ore supply will tighten this year, and possibly next, driving up the price, is optimistic. The risk to the price is on the downside.

If BHP and Rio decide to double up their bets, and not shut production even if the price gets down to break-even for them ($US35 or so) - that is, they decide to go into cash losses for a while to press home their siege of the Chinese miners - Fortescue might find that even if it's the lowest-cost producer it's still just breaking even or losing money, and it has fewer balance sheet resources with which to do that.

These are not good times to be invested in iron ore producers. They are now very definitely long-term investment propositions (remember that the definition of a long-term investment is a short-term one that didn't work out).

The turnaround will come, but picking the bottom will be hard.