fmg rail deal & brinsden blast over-reaction !, page-27

I think its interesting to consider what is happening.

Whilst the price is every other day hitting new lows Iron Ore keeps on remaining steady? Will this continue I have no idea.

However I think the analyst are selling their book. The coming Iron Ore glut IMO will not eventuate.

This will be simplistic but consider this simple example.

RIO is expecting production of 290mt for 2013. If they receive ave $139 (Goldman Sachs ave) a ton they generate $40,310,000,000 in revenue.

If they expand and produce to 360mt by 2015 and the Iron ore Price average $90 a ton that yr(as Goodman Sachs claim) they will generate $32,400,000,000.

So in that simple scenario they have spent $20 billion ( over 5 yrs to 2015) to increase their capacity to generate $7,910,000,000 less revenue and a lot less profit as the cost to produce 360mt is a lot more then 290mt.

I can't see how the miners will do this to themselves. Oil producers don't produce to capacity to cut their noise of despite their face, why would BHP, Vale, RIO etc They are huge dependent on Iron Ore revenue.

This talk of glut will scare of new competitor and new mines, it will solidify the position of the big three.

This article rocket973 on the GBG thread sums it it perfectly IMO.

Market forces to keep iron ore prices in check
Global Times | 2013-4-17 22:18:01
By He Rongliang

Many influential voices in the global mining and financial industries have recently put forward forecasts calling for drops in iron ore prices. BHP Billiton, one of the world's leading miners, said last week that iron ore prices would slump over the next couple of years as it and fellow global mining behemoths Rio Tinto and Fortescue Metals Group plan to expand output while economic growth rates slow. Similarly, Goldman Sachs slashed its three-year outlook on iron ore prices by 11 percent in March, when Rio Tinto also put forth predictions of a 50 percent slump within the next 18 months.

It's undeniable that turmoil in the international financial market and quantitative easing moves by governments around the world have turned up volatility on most commodities. But in light of the strong fundamentals underpinning the iron ore market, I don't subscribe to notions that prices are poised for the sort of climactic nosedive many are calling for.

First of all, I would argue that the relatively high iron ore prices seen now will act as a buttress against future drops. According to the marginal cost pricing theory as developed by Malthus, commodity prices tend to stay above production costs for the least efficient producers. If these producers can't realize a return on their efforts, they will abandon their work, thus leaving a gap in supplies which will again in turn boost prices higher than the costs for the most unprofitable producer.

Iron ore prices are subject to the same principles as well. In this case, miners in China have the world's highest iron ore production costs. Here, it costs between $100 and $130 per ton to turn out one ton of iron ore, well above the $30 per ton it costs big players like Rio Tinto and BHP Billiton to produce the same amount. But if prices sink below $100 per ton as Rio Tinto and Goldman Sachs predict, most of China's miners will suffer a loss. If the loss becomes so severe that these businesses shut down, supplies will quickly evaporate. As the world's largest iron ore consumer, half of China's demand is satisfied by domestic miners. If they can't deliver, local mills will have to rely on imports, which will again bolster prices in the global market.

Secondly, arguments that prices are set to dip on softening demand from China don't hold water. Though output on crude steel - a major end-product created from iron ore - decelerated last year, overall steel production has been picking up steam since February when authorities in China rolled out a slew of new infrastructure projects to spur economic growth. Over the last two months, China produced 125.45 million tons of crude steel, up 10.6 percent year-on-year, pushing average daily production to a record high of 2.13 million tons over the period. And demand is expected to remain robust through the coming months as the property and construction industries continue to show signs of increasing activity.

Lastly, those saying that a surge in supplies will flatten prices are also likely to be proven wrong. Global iron ore supplies are dominated by big miners who are sensitive to pricing. If the bottom drops out of the iron ore market, miners can be counted on to cut investment and output, despite their recent statements to the contrary.


The author is a steel analyst at the Distribution Productivity Promotion Center of China Commerce. [email protected].

http://www.globaltimes.cn/content/775645.shtml#.UW9bGkqXQbQ