Market may be underestimating iron ore boom
Analyst models expect the sky-high iron ore price to plunge 30 per cent in the next 10 weeks. But our mining giants have a different view of Chinese demand.
Updated Apr 21, 2021 – 12.45pm,first published at 11.50amThings could hardly be better for BHP and its shareholders.
With just 2½-months to go in the financial year, the mining giant’s March quarter production numbers released on Wednesday suggest it is on the cusp of beating its own iron ore export target for shipmentsin the full year of 286 million tonnes.
Better yet, the strong performance – arguably stronger than that of Rio Tinto, which dug into iron ore stockpiles during the March quarter – comes amid a demand boom that has sent iron ore prices to record levels in Australian dollar terms, and near all-time highs in US dollar terms.
KBHP boss Mike Henry is enjoying incredibly strong conditions in the iron ore market. David Rowe
The iron ore price jumped more than 4 per cent to $US189.61 overnight amid surging demand and ongoing concerns about supply from Brazil.
With prices at this level, it’s no surprise observers are recalling the heady days of the mining boom. But BHP and its fellow giants Rio Tinto and Fortescue Metals Group are very different companies. And this is a different type of price boom, too.
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$47.210 -0.51%View BHP related articlesApr 20Jul 20Oct 20Apr 2126.00039.00052.000Updated: Apr 21, 2021 – 9.46pm. Data is 20 mins delayed.AdvertisementThe below is funny as no mention of the circa $350 aud pellet price or the $240 per tonne margin.A decade ago, Australian mining was still rushing to ramp up to meet surging demand from China – BHP shipped just 134 million tonnes of ore in 2011, the year iron ore prices hit $US190 a tonne – and its unit costs per tonne were hovering around $US40 a tonne.
Prices are good, margins are better
On Wednesday, with its huge iron ore machine now fully built out and running close to top speed, BHP reaffirmed cost guidance for between $US13 a tonne and $US14 a tonne.
Prices are great, but it’s the margins that the Global Australian is enjoying right now that are truly historic.
The nature of this price boom is different, too.
While demand is again being led by China’s desire to stimulate its economy after the pandemic with construction and infrastructure spending, the US - and to a lesser extent Europe - are embarking on infrastructure spending sprees in a way they weren’t in the heady days of 2011 and 2012.
AdvertisementA consumption boom, particularly inside China’s now much more mature economy, is also adding to demand.
There are other subtle differences about this price boom. The carbon emissions created by steel making were only a vague concern 10 years ago, but are now at the forefront of the minds of miners and steel makers.
It’s notable that in his brief comments on the March quarter numbers, BHP chief executive Mike Henry dedicated almost as many words to the company’s efforts on decarbonisation in the quarter as he did to operations.
This focus on making cleaner steel is leading mills to increase demand for higher quality ore, which plays into the strengths of BHP and Rio.
Brazil is not keeping up
The other big difference this time around is the issues Brazilian iron ore giant Vale is having in ramping up production after a period of supply disruptions.
AdvertisementMonday brought yet another set of underwhelming production numbers from Brazil, giving the iron ore spot price another little kick along.
The iron ore price continues to confound analysts who have been predicting prices would soften thanks to weaker Chinese demand and stronger Brazilian supply for what seems like the best part of two years.
And to be clear, they’re staying firm on these predictions.
Goldman Sachs said on Tuesday it sees iron ore at $US137 a tonne by the end of June, implying a 27 per cent fall in the next 10 weeks. UBS sees the iron ore price ending the year at $US100 a tonne (which suggests a 47 per cent fall) before dropping to $US75 a tonne by the end of 2023.
The longer-term view may well prove to be right – Vale will get on top of its problems and the post-pandemic stimulus surge will fade.
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