A faster-than-expected increase in iron ore production by the world's biggest miners in Australia and Brazil this year is pushing less efficient, smaller suppliers of the steel-making raw material to the edge.
From Europe to Australia to the Middle East, smaller miners in the once-lucrative iron ore business are cutting output or shutting altogether despite rising demand, while a few mega miners are taking a bigger share of the US$130 billion seaborne iron ore market.
Big miners such as Vale, Rio Tinto and BHP Billiton are flooding the world with hundreds of millions of tonnes of cheaply mined ore, driving down prices by almost a third this year.
The price fall is squeezing higher-cost producers, while the big miners are feeling less pain due to ever-lower costs of production from economies of scale and increased sales. Barriers to entry are also increasing, shutting out all but those with access to the biggest ore deposits.
"Iron ore is fast becoming a big boys' game, with little room for the small or marginal producer," said Gavin Wendt of Australian consultancy MineLife.
By next year, major producers in Brazil and Australia will account for 1.15 billion tonnes or 83 per cent of world seaborne ore trade, according to Australian government data, up from 71 per cent in 2012.
Ken Brinsden, managing director of Australia's Atlas Iron, which produces 12 million tonnes a year, said "unprecedented" output from the majors could strip away up to 85 million tonnes of iron ore a year from suppliers in China and elsewhere.
At today's prices, about 200 million tonnes of Chinese production was unprofitable, said James Wilson, an analyst with Morgans Stockbrokers. "The likes of BHP and Rio Tinto are just too competitive to take on in this market," he said.
Macquarie Bank research showed use of domestic ore by Chinese steel mills fell to 241 million tonnes in the first quarter of this year, down 40 million tonnes from the fourth quarter last year.
That is not surprising, given that only a third of Chinese mines have direct links with the mills, leaving the majority to compete in the price-driven marketplace.
The big miners, meanwhile, are beating forecasts as they churn out more ore. BHP expects to produce 245 million tonnes this year, up 9 per cent on last year and well ahead of expectations. Rio Tinto is also boosting output 9 per cent to 290 million tonnes. Vale is aiming for 312 million tonnes and produced a record amount in the second quarter of the year.
Chinese customs data showed a significant decline in imports from countries with smaller stakes in the seaborne iron ore market.
"Higher-cost producers are being displaced by lower-cost producers like Australia and Brazil," Vale said. "This is already happening and will increase over time."
Exports from Iran, the world's eighth-biggest supplier in the seaborne market, fell by a third year on year last month to just 1.2 million tonnes, Iranian industry data showed.
Source: South China Morning Post
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