Chinese steel producers are decreasing their production to more sustainable amounts, putting smaller West Australian iron ore projects at risk of price falls in the chief export commodity.
ANZ global head of commodities research Mark Pervan said the good phase for low-cost companies BHP Billiton, Rio Tinto and Brazil’s Vale have finished.
“We have had a golden era for iron producers who have made 150 to 200 per cent EBIT (profit) margins,” Pervan said yesterday.
“In an industry which is consolidating, the top three have kept the market quite tight.”
Seaborne iron ore prices have seen a decline from over $US150 a tonne to about $US110 a tonne since February, bringing uncertainty on marginal producers and several projects that are in the development stage.
Pervan went to China last week and said new projects were out of the question at a price below $US150 a tonne, The Australian reported.
“We have seen a decline in steel prices in China and that is dragging down iron ore prices,” he said.
“Even at $US110 to $US120 a tonne there’s little incentive for expanding iron ore production.”
On Friday, Hong-Kong based Citic Pacific said its $US8 billion ($8.3bn) Sino Iron project in northern WA is facing more delays due to the postponement of the first shipment of magnetite ore from the end of May until the second half of the year.
As prices fluctuate between $US160 a tonne and $US90 a tonne this year, iron ore has been twice as unstable as other commodities, Citi said in a report this week.
“At the moment we are at risk from the worst of both worlds, with volatility remaining high in the near term and new supply driving prices in the medium to longer term,” the company said.
“Major iron ore producers should at least address one of these issues or remain friendless in the market.”
The firm believes large miners should behave in an ‘oligopolistic’ manner by holding back supply when demand is down, instead of selling it on the spot market.
The multi-billion dollar Aquila Resources’ West Pilbara mine, the Cape Lambert magnetite venture and Sinosteel’s Weld Range project are some of the other ventures that have been postponed or abandoned.
Australian Mining reported last week Pilbara iron ore producers could face an $18 billion annual profit cut as steelmaking raw material fell to a seven-and-a-half month low of $US112.90 a tonne, a 22 per cent drop from the March quarter.
The fall was a result of destocking by China steel mills as steel prices declined and the industry faces over-capacity.
Traders had 10 million tonnes of unsold steel at the end of March, 80 per cent up on the quarter, according to the China Iron and Steel Association.
Pervan said substantial short-selling of Chinese steel futures had influenced market dynamics.
UBS mining analyst Glyn Lawcock also visited Chinese steelmakers and reported that some said $US120 a tonne was too expensive but would restock if it dipped to $US100 a tonne.
“We think the price will average $US120 a tonne this year and average $US100 a tonne in 2014, but fall below $US100 a tonne in 2015,” he said.
The Rebar (steel rod) index closed at 3424 Yuan a tonne ($580) on Friday, just over Thursday’s nine-month low.
The index plummeted to a record low of 3376 Yuan last September.
“We saw similar dynamics last August when (iron ore) prices fell to $US88 a tonne,” Pervan said.
“Eventually these speculators will move out of t he market, but unlike last year we can’t see prices bouncing back in a hurry.”
Lawcock said while Chinese steel consumption was going at a ‘reasonable’ speed, it was not robust enough to substantiate production of 780 million tonnes per year.
Uneconomical companies were losing money at existing levels.
“If steel prices at least plateaued, they would need to take $US20 a tonne (off the iron ore price) to bring them back to break even,” he said.
Macquarie Equities are predicting the Chinese to slash 200 million tonnes of steelmaking in the next two years.
The demand trend will impact several iron ore projects such as Gina Rinehart’s Roy Hill development, which has not acquired finance.