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China economist warns major miners may collapse in 2016
By business reporter Sue Lannin
Updated yesterday at 10:43am
PHOTO: BC Iron has shut down its mining operations until prices improve. (Sue Lannin: ABC News)
MAP: Australia
A prominent China economist has predicted more mining companies could go bankrupt globally in the new year, including major second tier firms, as China's economy slows down and commodity prices keep falling.
China based economist Andy Xie used to run Morgan Stanley's economics team in Asia.
He has forecast that iron ore prices will trade between $US30-40 a tonne in 2016, and that means more iron ore miners could go under including in China.
"So what I see is that next year Chinese demand is likely to go down a lot more, like 20 million tonnes," Mr Xie told the ABC in an interview.
"And exports will rise less, maybe like 2 million tonnes so the whole production will shrink by at least, I believe, 10 million tonnes.
"So the support for any increase in price is not there."
Mr Xie said a lot of mines in China were in dire straits.
"They've been kept going by local government support, but local governments are all in financial trouble - they have so much debt," he said.
"So I do see a lot of the mines in China will go under."
However, Mr Xie does not think that less supply in China will help higher cost Australian miners, such as Atlas Iron, BC Iron and Fortescue Metals, with iron ore prices expected to fall further or remain around the current price of $US38.20 a tonne.
"I think that anybody who is hoping for a turnaround in price will be in deep trouble next year," he warned.
Mr Xie said Australian miners with higher production costs will struggle, including Fortescue Metals, which has a multi-billion-dollar debt because it had to build its own port and rail infrastructure to export its iron ore.
SOUNDCLOUD: Many miners struggling with high debt and low prices
"I think anybody who still has a huge bill for developing infrastructure, these people are in deep trouble," Mr Xie added.
The analyst refused to name names, but he said at least one Australian company could go under.
He said globally more miners faced collapse.
"I do see bankruptcies, even major players who seem very large, I think bankruptcies are quite possible in 2016," Mr Xie forecast.
"I think tier two, tier three companies ... will be in trouble, especially the ones who were expanding very rapidly, buying assets and trying to increase in size by buying assets at very high prices."
Earlier this month, global miner Anglo American said it would sack 85,000 workers out of a 135,000-strong workforce and close or sell mines, including in Australia, as it merges six divisions into three.
Mr Xie said there were few buyers for Anglo's four Australian coal mines which are on the market.
BC Iron hanging on despite mining suspension
The slump in iron ore prices is already causing severe hardship for many smaller miners.
Small Western Australian miner BC Iron last week said it would suspend production at its Nullagine mine in the Pilbara because it was losing money as the iron ore price fell below $US40 a tonne.
We envisage we can hang on for as long as it takes.
Morgan Ball, BC Iron
BC Iron's managing director Morgan Ball told the ABC in an interview that the company had lost money for two to three weeks, despite a dramatic reduction in production costs.
"About a year ago our breakeven on the headline price that you see in the newspaper was about $US54," he observed.
"We've worked really hard in the last 12 months to get that down to about $US43-45.
"Unfortunately the price has dipped below that, so $US39, $US38, you could assume if that continued and, subject to what the Australian dollar does, we would potentially be losing, if continued to operate, anywhere between $3 to $8 a tonne."
PHOTO: BC Iron managing director Morgan Ball says the company is looking at mining other commodities. (AAP: Kim Christian)
The shutdown plans saw the company's share price hit for six, falling by half over the past week to 11 cents.
BC Iron's share price is down more than 80 per cent over the past year, but the company is in a better position than some of its rivals.
Nullagine is a joint venture with Fortescue Metals and is situated at FMG's Christmas Creek mine.
By the end of December, BC Iron will have cash on hand of more than $40 million and about $11 million in debt, comprised of a $2 million debt to off-take partner, Henghou, and $9 million in royalty repayments to the West Australian Government.
The company said repayment of the royalty rebate will start in March next year.
It is also still getting revenue from the Iron Valley mine, an asset gained from its takeover of Iron Ore Holdings, which it bought from billionaire Kerry Stokes.
Morgan Ball remains upbeat, despite an earth shattering week for the miner.
"Mineral Resources runs Iron Valley and we receive cash flow from that, as long as that's being run we'll receive cash flow," he said.
"So we envisage we can hang on for as long as it takes.
"We do have some exploration opportunities in other metals and we have a skilled team that can work in other commodities and we will consider all our options during 2016."
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