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Released April 29, 2015 | SUGAR LAND
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Researched by Industrial Info Resources Australia (Perth, Australia)--It's no secret that Australia's iron ore situation is extremely dire, as miners continue their desperate struggle to remain afloat. Thousands of jobs in the mining industry have been lost since early 2014, and with Atlas Iron Limited (ASX:AGO) (Perth, Western Australia) recently suspending production across its mining operations, a further 600 jobs have been put at risk. Geologists and engineers are unable to find and keep work as the mining industry shifts from the construction to production phase.
Indeed, there is much speculation as to which miners could next lose their jobs as the iron ore price continues to dip. BC Iron Limited's (ASX:BCI) (Perth) managing director Morgan Ball has stated that the company is keeping a close eye on the iron ore price, while media outlets continue to speculate on whether Fortescue Metals Group Limited (ASX:FMG) (Perth) can withstand the pressure--and the consequences that FMG's exit could have for the Australian economy.
The situation is also affecting companies that rely on a strong iron ore industry to stay in business. Only recently, Aurizon Holding Limited (ASX:AZJ) (Queensland, Australia) delayed an investment decision to progress with its planned 430-kilometer rail line to Anketell Point in the Pilbara. Similarly, Atlas Iron Limited's (ASX:AGO) (Perth, Australia) key transport contractor McAleese Group (ASX:MCS) (Melbourne, Australia) entered a trading halt in response to Atlas Iron's decision to shut its mines.
Earlier this month, the iron ore price was at a 10-year low of US$46.70 a tonne. Much of the blame for low iron ore prices has been placed on mining giants BHP Billiton plc (NYSE:BHP) (Melbourne, Australia) and Rio Tinto plc (NYSE:RIO) (London, England), which have continued to flood the market despite rapidly slowing demand from China. The Chinese government also has moved to protect its domestic steel industry by subsidizing iron ore miners to help their mines remain open to keep supplies flowing. China also is slashing taxes for local iron ore miners to prevent mass job losses in the domestic market, allowing Chinese iron ore mines to continue to feed the saturated market.
For these reasons, analysts at Citibank expect prices to fall below US$40 a tonne for the rest of the year as aggressive shipments from Australian exporters have weighed on prices. If the price gets much lower, they believe BC Iron will be forced to mothball its mines to avoid financial demise. Similarly, Treasurer Joe Hockey announced that the government is wary of an iron ore price as low as US$35 per tonne, certainly placing further strain on the Australian federal budget, which is set to take a $30 billion revenue write-down over the next four years due to the iron ore price decline. In fact, 30% of Australia's anticipated 800 million tonnes of iron ore exports would be unprofitable at prices close to US$35 a tonne, eliminating every producer in the market except heavyweights BHP Billiton and Rio Tinto.
Despite these predictions, the price of iron ore has surged to almost US$60 per tonne this week. Some analysts believe that the price has climbed following signs of supply cutbacks and a new stimulus package in China. BHP Billiton said publicly that it was slowing down its expansion, placing an upgrade at Port Hedland on hold, which would slow the company's expansion target by 290 million tonnes per year. Beijing's decision to cut its required reserve ratio for banks by one percentage point will supposedly inject US$200billion to $300 billion into the Chinese banking system, which economists expect will enable more investment in construction, lifting demand for Australia's iron ore.
Despite the positive climb in price, the fact remains that the market is still oversupplied while Chinese demand has peaked. This makes the iron ore industry incredibly volatile. Despite BHP Billiton's slowdown, it is worth remembering that the Roy Hill Project will release more iron ore into the market sometime between August-September, while the Chinese residential market remains weak. The Chinese-owned Sino Iron Mine is also set to inject 24 million tons per year of magnetite into the market after the last four concentrator production lines have been completed.
Furthermore, a missing element to the current iron ore price forecast is the recent acquisition of the remaining 75% stake in the massive Tonkoli magnetite iron ore mine in Sierra Leone by Chinese steel company Shandong Iron and Steel Group. A planned cash injection of US$600 million will return the mine to full production and initiate Phase II of the project, which will lift production to 25 million tons per year. Restarting the mine and increasing global output of iron ore clearly displays China's strategy to demolish the iron ore price further throughout the year.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
Indeed, there is much speculation as to which miners could next lose their jobs as the iron ore price continues to dip. BC Iron Limited's (ASX:BCI) (Perth) managing director Morgan Ball has stated that the company is keeping a close eye on the iron ore price, while media outlets continue to speculate on whether Fortescue Metals Group Limited (ASX:FMG) (Perth) can withstand the pressure--and the consequences that FMG's exit could have for the Australian economy.
The situation is also affecting companies that rely on a strong iron ore industry to stay in business. Only recently, Aurizon Holding Limited (ASX:AZJ) (Queensland, Australia) delayed an investment decision to progress with its planned 430-kilometer rail line to Anketell Point in the Pilbara. Similarly, Atlas Iron Limited's (ASX:AGO) (Perth, Australia) key transport contractor McAleese Group (ASX:MCS) (Melbourne, Australia) entered a trading halt in response to Atlas Iron's decision to shut its mines.
Earlier this month, the iron ore price was at a 10-year low of US$46.70 a tonne. Much of the blame for low iron ore prices has been placed on mining giants BHP Billiton plc (NYSE:BHP) (Melbourne, Australia) and Rio Tinto plc (NYSE:RIO) (London, England), which have continued to flood the market despite rapidly slowing demand from China. The Chinese government also has moved to protect its domestic steel industry by subsidizing iron ore miners to help their mines remain open to keep supplies flowing. China also is slashing taxes for local iron ore miners to prevent mass job losses in the domestic market, allowing Chinese iron ore mines to continue to feed the saturated market.
For these reasons, analysts at Citibank expect prices to fall below US$40 a tonne for the rest of the year as aggressive shipments from Australian exporters have weighed on prices. If the price gets much lower, they believe BC Iron will be forced to mothball its mines to avoid financial demise. Similarly, Treasurer Joe Hockey announced that the government is wary of an iron ore price as low as US$35 per tonne, certainly placing further strain on the Australian federal budget, which is set to take a $30 billion revenue write-down over the next four years due to the iron ore price decline. In fact, 30% of Australia's anticipated 800 million tonnes of iron ore exports would be unprofitable at prices close to US$35 a tonne, eliminating every producer in the market except heavyweights BHP Billiton and Rio Tinto.
Despite these predictions, the price of iron ore has surged to almost US$60 per tonne this week. Some analysts believe that the price has climbed following signs of supply cutbacks and a new stimulus package in China. BHP Billiton said publicly that it was slowing down its expansion, placing an upgrade at Port Hedland on hold, which would slow the company's expansion target by 290 million tonnes per year. Beijing's decision to cut its required reserve ratio for banks by one percentage point will supposedly inject US$200billion to $300 billion into the Chinese banking system, which economists expect will enable more investment in construction, lifting demand for Australia's iron ore.
Despite the positive climb in price, the fact remains that the market is still oversupplied while Chinese demand has peaked. This makes the iron ore industry incredibly volatile. Despite BHP Billiton's slowdown, it is worth remembering that the Roy Hill Project will release more iron ore into the market sometime between August-September, while the Chinese residential market remains weak. The Chinese-owned Sino Iron Mine is also set to inject 24 million tons per year of magnetite into the market after the last four concentrator production lines have been completed.
Furthermore, a missing element to the current iron ore price forecast is the recent acquisition of the remaining 75% stake in the massive Tonkoli magnetite iron ore mine in Sierra Leone by Chinese steel company Shandong Iron and Steel Group. A planned cash injection of US$600 million will return the mine to full production and initiate Phase II of the project, which will lift production to 25 million tons per year. Restarting the mine and increasing global output of iron ore clearly displays China's strategy to demolish the iron ore price further throughout the year.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, five offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
