Fex gets a mention in the AFR today, i'm starting to believe the Chinese own the AFR!
This last quote at the end of the article is
yes it is different!Iron ore investors who are enjoying high share prices and dividends should ask themselves whether prices will hold forever and whether “it’s different this time”.Article below.
Opinion
Five triggers that will force iron ore price downAll miners’ profits would be affected, but the most exposed would be high-cost producers.
Mark DraperContributor
Jun 15, 2021 – 12.00am
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With some again calling for the
re-introduction of a mining tax, does this signal the top of the iron ore price cycle? Three of the largest 20 companies on the ASX are iron ore miners, so Australian investors need to be across the iron ore price.
For most of its traded life, iron ore was sold on a contracted basis and sales were direct between two parties. This was a stable period for prices where they averaged $US20 to $US30 a tonne until a spot market with daily pricing was introduced in the early 2000s.
Producers in the Pilbara are trucking iron ore hundreds of kilometres to port at a cost of $US100 a tonne and still making a very high margin. Getty
Since then, the spot price has probably averaged $US50 to $70 a tonne, according to Gaurav Sodhi, deputy head of research at InvestSmart. Today it trades at more than $US200 a tonne, which Sodhi says has never happened before.
The high price, says Atlas Funds Management’s Hugh Dive, is a result of rising iron ore demand from China, Australian miners operating at capacity, and supply constraints from Brazil, the second-largest iron ore producer. Dam collapses in 2019 and COVID-19 in 2020 removed about 85 million metric tonnes (MT) from Brazil’s annual production to about 300MT. For perspective, China imports about 1 billion MT a year.
The similarities to 2011, the last time the iron ore price was very high, are that demand is being driven by a $US506 billion stimulus plan announced by the Chinese government in May 2020. This is slightly smaller than the $US586 billion package announced during the global financial crisis, which saw the building of steel-intensive bridges, rail lines and airports. The difference to 2011 so far is that the supply response this time is slower.
During a boom, though, it is usually difficult to forecast what will bring it to an end. Sodhi says producers in the Pilbara are trucking iron ore hundreds of kilometres to port at a cost of $US100 a tonne and still making a very high margin.
Dive believes there are five events that could lead to lower iron ore prices. He says the period between 2012 and 2016 provides a good road map as to how the “air” could get taken out of the iron ore price, though the situation is likely to unravel faster this time.
- Brazil moves back to full production of about 380MT a year with goals to increase to 400MT. Current annual production is forecast to be about 335MT this year, and appears to be rising.
- Chinese consumption of iron ore slows as the impact of stimulus measures fade.
- High prices incentivise production. Mt Gibson Iron recently opened up mines that had been closed after flooding.
- New entrants into the market such as Mineral Resources expand from contract mining and mining services to producing their own iron ore.
- In the medium term, China naturally shifts to using electric arc furnaces (EAF). EAF uses scrap steel and electricity rather than iron ore and coking coal to produce steel. As an economy matures, it starts to generate scrap steel from buildings that are torn down and cars that are recycled. In the US, 70 per cent of steel is produced by EAF; in China, it is only 15 per cent.
Should the iron ore price fall, all iron ore miners’ profits would be affected. But the most exposed, says Sodhi, are high-cost producers that have entered the market to exploit current conditions.
Small producers such as Fenix would not be able to sustain operations in a “normal” environment.Dive highlights that iron ore accounts for 100 per cent of earnings for Fortescue and only 79 per cent for Rio and 69 per cent for BHP. Mt Gibson Iron generates all of its earnings from iron ore.
Low-cost producers such as BHP are likely to be less affected as they can still make healthy margins even when iron ore is $US50 to $US70 a tonne. Even so, it’s worth looking at BHP’s share price chart during the 2012-2016 iron ore collapse.
Iron ore investors who are enjoying high share prices and dividends should ask themselves whether prices will hold forever and whether “it’s different this time”.
(20min delay)