A method to iron ore madness?

For many years China dominated the markets in many strategic metals and minerals through over-producing, driving down prices and putting Western producers out of business. One only has to look at a listing of such metals and minerals where China is still the dominant global supplier to see how this has worked out. However, more recently, China has been finding itself somewhat stretched in maintaining output for many of these and has been restricting supplies to global markets, perhaps to stimulate price rises and bring its increasingly uneconomic, and often seriously polluting, mines on to a more profitable basis, although officially it is to preserve supplies for domestic industry.

Meanwhile, in the real world, one of the biggest traded commodities of all – iron ore – has been seeing hugely reduced prices, largely due to a fall in production at China’s steel mills coupled with dramatic oversupply primarily engendered by huge expansions at top producers Rio Tinto, BHP Billiton and Vale, all of which have sufficient high grade iron ore resources to be able to mine them at current prices and still derive good profit margins, albeit at rather lower levels than in recent years. They are making up revenues otherwise hit by falling iron ore prices by substantially increasing volumes.

Bit like China with its strategic metals and minerals production policies of the past, this is having a devastating effect on smaller and newer producers who have been exploring, and in some cases developing, new mines on the basis of $100/tonne plus iron ore – there are parallels with the gold sector here where many new mine projects have been predicated on a $1 300 gold price or more. These new operators are now struggling to stay afloat – indeed some have already fallen by the wayside and it has virtually put a stop to new mine development in the sector.

It’s uncertain whether this was a concerted policy by the big iron ore miners to re-exert their dominance of the sector. They certainly wouldn’t admit it if there was, but the net result (perhaps unintended consequences, although in this case beneficial to the big producers) is likely to be that when the Chinese and Western steel sectors do recover, which they inevitably will, the iron ore markets will be even more dominated by the big three producers and a few other major miners. Meanwhile some of the potential would-be competitor miners – particularly those with massive potential infrastructure costs for transport of ore and/or lower ore tenors requiring additional upgrading to generate an acceptable product – will just not be able to survive the lower price environment. Operations will close, perhaps never to reopen; finance will be cut off as the bankers consider the risk too great; and new projects just won’t get built.

Rio Tinto and BHP Billiton have taken a certain amount of institutional and shareholder flak in the face of their big expansions as prices are falling, but perhaps there is method in their madness. Longer term they will probably end up reaching new record earnings levels as prices recover.

This article appears courtesy of Mine Web. To read more international and financial resources news click here.

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