It’s déjà vu all over again for Australia’s iron ore miners as the price of the steel making ingredient heads south and their share prices follow.
There has been nowhere to hide in the iron ore sector today with BHP Billiton (BHP.AU) (BHP) down 2.8%, Rio Tinto (RIO.AU) (RIO) down 3% and Fortescue Metals Group (FMG.AU) down 5% and trading at its lowest levels since 2009.
Having put in a nice rally from a low of $47 a tonne in April to a peak of $65 a tonne in mid-June, iron ore is now trading just below $50 a tonne as concerns mount about waning Chinese demand and a new wave of supply hitting the market over coming months and years.
Here’s RBC Capital Markets on what they expect for iron ore prices over coming months;
Brokers like JPMorgan had been warning that the bounce in iron ore prices would not be sustained and that prices would trough in the high $40 range in the second half of the year. One of their major concerns has been the flood of new supply set to hit the market, with the broker estimating that the big four producers, which includes Brazil’s Vale, will bring on 250 million tonnes a year of additional capacity between 2014 and 2020.
JPMorgan has argued that the key resistance point for prices is $45 a tonne because “below this price the economics of brownfield supply growth from low cost producers becomes more challenging.”
The renewed weakness in iron ore prices has reignited debate between large and small miners, with the latter accusing the likes of BHP Billiton and Rio Tinto of running their operations at full capacity in order to drive down prices and squeeze competition from the market.
Given the importance of iron ore prices to the Australian economy and budgets, the fight within the industry has become increasingly more political. Fortescue Metals Group chairman Andrew Forrest has been unrelenting in his criticism of BHP Billiton and Rio Tinto, while there have been reports in Australian media of small miners undertaking “push polling” to shape public opinion against the heavyweights of the industry.
For a better understanding of the pressure on junior miners take a look at this video interview Livewire did with Atlas Iron chief executive David Flanagan, who runs through the dynamics of the iron ore market. Bear in mind the stock traded as high as AUD4.34 in 2011 but is now suspended at AUD0.12 a share.
However, the big end of the industry isn’t taking this lying down. The Minerals Council of Australia, which includes BHP Billiton and Rio Tinto as member companies, released a report in conjunction with consultant Port Jackson Partners earlier this week in which it claimed the “actions of the iron ore industry over the past decade have been exactly right from an national interest point of view” given Australia now controls around 50% of the market. And don’t even mention the possibility of government intervention;
Source: Barron