It was a mixed December quarter for iron ore miners Murchison Metals and Mount Gibson Iron, as demand for the commodity lowered one miner's shipments but raised the other.
In its quarterly report out late yesterday, Mount Gibson reported it had shipped 529,000 wet metric tonnes of lump and fines, down from the previous quarter's 656,000t.
During the quarter, the company announced that some of its customers had defaulted on binding offtake deals, which brought to light the state of the global iron ore market to investors.
Mount Gibson said agreements with three of the customers have been terminated and a dispute with a further customer has been referred to arbitration.
Meantime agreements have been reached with the company's remaining original customer base for the remaining contract year. Also the company signed offtake deals with APAC Resources and Shougang Concord during the period.
At the end of the quarter, the company reported an unaudited net profit of $13.3 million and had $137 million cash on hand, including some of the proceeds from capital injections by APAC and Shougang.
"After a very strong result for the September 2008 quarter, the December quarter was negatively impacted by significantly reduced sales volumes, reduced sale prices and a $54.8 million mark-to-market adjustment relating to forecast excess foreign exchange hedging," Mount Gibson said.
Meantime, Murchison fared better than its rival during the period, reporting its second highest quarter of shipments since the start of operations at its Jack Hills mine in the Mid West region.
The company shipped 405,084 tonnes of lump ore, up from the previous quarter's 176,194t.
Murchison did not ship any fines during the quarter.
Managing director Trevor Matthews told WA Business News that customers had not requested fines during the period however in the current environment, fines shipments are expected to pick up.
The company produces around two-thirds lump ore and the rest in fines. Over the quarter mined 331,443t of ore, down from 495,507t recorded in the September quarter.
At the end of the period, the company had cash and liquid investments of $162 million and was debt free.
Shares in Mount Gibson closed down 1.5 cents to 38.5c while shares in Murchison dropped 4.5c to close at 51.5c.
Iron ore prices forecast to fall 25%
Analysts at CommSec have forecast iron ore prices to fall by 25 per cent this year as the Chinese push for lower prices after being squeezed over the past five years.
Iron ore price negotiations have kicked off early this year with 2008 prices to officially end on the last day of March to coincide with the start of the financial year for Japanese companies.
However Chinese buyers want to end the new pricing cycle in December 31 to coincide with the end of their financial year.
Last year, iron ore giants BHP Billiton and Rio Tinto locked in an average increase in iron ore prices of 85 per cent.
This year, steel producers are looking to settle contract prices quarterly and not yearly, with CommSec market analyst Juliana Roadley expecting it to work in favour of the miners as prices are forecast to recover later this year.
"CommSec expects China and Japan (two of the top 5 importers of iron ore) to take advantage of the recent slump in spot prices and drop in export demand to lock in cheaper contract prices," Ms Roadley said.
"We anticipate parties will agree on a 25 per cent cut in the price negotiated on iron ore fines to just under US$70 per tonne, down from the record high of US$92/tonne set in 2008, when demand for iron ore was at an all-time peak."
A deep cut in iron ore prices could mean producers will have to cut back production, roll back expansion plans and reduce staff to meet new budget requirements.
Rio Tinto has already flagged a 10 per cent cut in annual iron ore production in the Pilbara whule BHP has announced production cutbacks to only meet current demand requirements.
Ms Roadley added that spot prices for iron ore in China are now at more realistic prices, falling over 70 per cent since their peak in February last year of nearly $US200 per tonne on the back of the global slowdown.
However the price has rebounded in the last month as tight credit conditions have restricted funds needed for exploration, new projects and day-to-day running costs at mines.
Meantime, global iron ore output fell by 19 per cent November and Ms Roadley expects more cuts to come.
"The sharp decline in iron ore output is another reason why Chinese and Japanese steel makers would be happy to lock in prices as soon as possible," she said.
MMX Price at posting:
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