Some analysis re RIO figures from Business Spectator. Copyright prevents me from posting whole article but its gloomy outlook for smaller high-cost IO producers.
There is no comfort for second-tier iron ore miners in Rio Tinto’s latest production numbers, despite it modestly revising downwards its production guidance for this year.
While first half global iron ore production was 11 per cent higher than last year’s, with second-quarter volumes 7 per cent ahead of the first quarter’s, poor weather in the first half (including two cyclones and heavy inland rain) reduced shipping capacity by about seven million tonnes of ore.
That lost production has resulted in Rio lowering its full-year guidance (on a 100 per cent basis) from its Australian and Canadian operations from about 350 million tonnes to 340 million tonnes.
Rio’s Sam Walsh, however, noted that Rio has now completed the key elements of its Pilbara infrastructure expansion. The group said the focus was now on ramping up its new equipment to full capacity. It added about 40 million tonnes of "very low-cost brownfields expansions" during the June half.
Rio might have cut its full-year production guidance but 340 million tonnes compares with the 295.4 million tonnes it produced in 2014. It is on track to increase production by about 45 million tonnes, or 15 per cent, this year.
Moreover, now that it has completed the last of the massive expansions it committed to during the boom years for iron ore, it has the integrated infrastructure in place to achieve the 360 million tonnes a year that is its targeted capacity. Five years ago it produced less than 240 million tonnes.
BHP Billiton is in a similar position, having committed to its final significant investment in its Pilbara operations in 2011.
It has forecast iron ore production of about 250 million tonnes this year (up from 225 million tonnes last financial year) and, while it has slowed its path towards its previously nominated goal of 290 million tonnes a year to avoid further investment, it has said it can get to 270 million tonnes. Five years ago it produced just under 135 million tonnes.
Thus, while the ramp up in production from the two big Pilbara miners is nearing its end, there is still more than 100 million tonnes of additional capacity that will have been added since the start of their last financial years that is coming into the market or that will hit the market over the next year or two. The extra volumes are low-cost and involve low capital intensity; Rio said its brownfields expansions had capital intensity of about $US9 a tonne.
Given their low-cost status, their efforts to continue to drive down costs and the impact of the extra volumes on the productivity of their expanded infrastructure, Rio and BHP hold the strong ground in an industry under intensifying pressure.
Its major rivals are being forced to lower their costs in the near term by whatever means they can -- whether by 'high-grading' or, in Vale’s case, actually halting higher-cost production -- to protect their longer term viability. While the iron ore price has slightly recovered to hold at about $US50 a tonne, the pressure on smaller and higher-cost producers to exit the market mounts daily.
There were missed interpretations of Vale’s announcement this week that it will cut 30 Mtpa of relatively high-cost production while leaving its 2015 production target of 340 million tonnes unchanged, but it did signal the pressure on Vale and its less economic resources.
It also signalled Vale’s willingness/need to shut down significant volumes of ore from its older systems as it waits for its massive new ultra low-cost and high-quality S11D project to start coming on stream next year. That ore may, if the pressure on the price continues, displace more of Vale’s existing production rather than add to it.
It remains to be seen whether Vale can make up for the 30 Mtpa it is already taking out of the market via higher productivity from its other operations, particularly if the price falls back below $US50 a tonne (there are those who see it dropping below $US40 a tonne under the weight of rising over-supply) and puts even more pressure on the economics of its marginal resources.....
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