Pilbara iron ore producers could be in for an $18 billion annual revenue cut.
The revenue hit comes as prices for steelmaking raw material fell to a seven-and-a-half-month low of $US112.90 a tonne. That is 22 per cent less than the average for the March quarter of $US145 a tonne.
This came as a result of new rounds of destocking by steel mills in China as steel prices decline and the industry faces over-capacity, The Australian reported.
Based on the slumped prices, if production reaches 550 million tonnes this year, revenue would fall $18 billion of what was expected in the March quarter.
The share market closed 0.88 per cent lower due to weakness in iron stocks.
Rio Tinto was down 1.35 per cent, BHP Billiton was down 1.18 per cent and Fortescue fell by 3.35 per cent. But smaller mining companies felt much of the brunt with Atlas Iron down 6.1 per cent and Mount Gibson down 4 per cent.
The Organisation for Economic Co-operation and Development downgraded its prediction for Australia’s economic growth this year, and the International Monetary Fund did the same for China, even as construction steel prices fell considerably there.
Smaller Chinese mills are selling iron ore shipments back to the market, and traders were unloading shipments at a loss in fear prices would further decline.
Commodities analysts at the Commonwealth Bank said that even if Chinese mills refill stockpiles, the country’s iron ore supply capability rises, and global seaborne rises, reports ‘suggests that iron ore prices may be weaker in the second half of 2013’.
Rio will feel the brunt of the dip in iron ore prices from a high of $US152 in mid-February, and chief executive Sam Walsh will have to reconsider the $US5 billion expansion of mine capacity at its Pilbara operations, planned for the fourth quarter of 2013.
The company is targeting a mining rate of 290 million tonnes but it would have to increase this to 360 million tonnes to equal the locked-in capacity rate of Rio’s port and rail infrastructure in the Pilbara.
But two weeks ago Walsh said Rio could either establish new mines to supply extra production faster or save money and reach targets with increasing output from existing mines
Atlas chief Ken Brinsden said yesterday the instability in iron ore prices was caused by a change from annual benchmark contract pricing to index/spot pricing.
“It affords an opportunity for volatility to unfold in a way that it hasn’t historically in iron ore markets, so we are getting used to that and positioning our business so we can deal with the volatility.”
He added the prices would not remain on the lower side much longer as the supply-demand principle indicated strong demand.
“Our view is elevated pricing will prevail,” he said.
Atlas said yesterday it will soon determine whether to build a new mine in the Pilbara by the end of next month after getting final state and federal government environmental approvals.
The company is looking to produce three million tonnes of iron ore a year from its Mount Webber mine. It is expected to commence in 2014.
The decision to push ahead with the project will be made at the end of June.
Atlas said last year it is still bullish on the future of iron ore mining after posting a full year loss of $114.6 million.
The company pointed to low commodity prices and the high Australian dollar for the losses.
Brockman Mining near Pilbara signed a non-binding agreement with Tianjin Port Group. Under the agreement, the Chinese state-owned company will look at investing in Pilbara infrastructure.
Australian Mining reported Fortescue Metals told Brockman Mining it could charge the company up to $576 million a year to gain access to a section of its Pilbara rail line. Third party access negotiations are ongoing.
The junior iron ore explorer is looking to move up to 20 million tonnes of iron ore annually from Marillana to a proposed rail spur near Port Hedland.