Iron ore prices heading for 5 year low as big miners increase output

Copyright © 2014 Rio Tinto

Iron ore prices have slumped to $89.02 a tonne yesterday – the lowest since September 2012 – and are just $0.94 away from dropping to the lowest level since 2009, as increased supplies from Australia boost a global surplus and prompt the closure of some higher-cost Chinese suppliers.

Iron ore prices heading for 5 year low as big miners increase output
Copyright © 2014 Rio Tinto

The steep fall in the iron ore price – 34% this year – is largely attributed to the increased output from giant miners such as BHP Billiton and Rio Tinto, who operate at low cost and are therefore able to withstand  the market pressure, unlike many of their high-cost peers.

According to the Business Spectator, BHP Billiton Chief Executive Andrew Mackenzie confirmed the company was readying to spend an extra $US3.25 billion to bring more ore on to the market in a bigger-than-expected expansion of its West Australian mines.

The world’s biggest miner said it was looking to expand its Pilbara iron ore mines and ports to annual capacity of 290 million tonnes a year, up from a previous target to grow to 270 million tonnes and at a forecast capital cost that is dramatically lower than guidance given to analysts a year ago.

“We would say it is quite unlikely that we would see prices north of $US100 a tonne, so our forecasts are obviously based on something below that,” Mr Mackenzie told British media when asked if there might be a price floor around current price levels.

Seeing as BHP operates at a cost of about $US40 a tonne, it is clear that prices would have to fall much lower than at the moment for the expansion to not look attractive.

Analysts predict that major producers in Australia, which have average costs of about $40 to $50 a tonne, will continue to increase supplies even with prices near the lowest level in five years.

“There’s still room for iron ore prices to go down. There will be a lot of cheap seaborne supply to replace Chinese market share. They will drive the price down lower,” said Helen Lau, an analyst at UOB Kay Hian Ltd.

“For low-cost quartile producers BHP or Rio, their grin just turns to a smile (when the price falls) because they are still getting a good margin out of their iron ore business,” Fat Prophets analyst David Lennox told AAP.

According to Bloomberg, Rio Tinto also plans to boost output 11% this year to 295 million tonnes, and estimates output of more than 330 million tonnes from next year.

“The major iron ore players are determined to ‘crowd out’ smaller, higher-cost producers,” said Gavin Wendt, founder and senior resource analyst at Sydney-based Mine Life Pty.

“Rising production will also, to some degree, offset falling prices for these companies, as their margins remain strong.”