Profit margins still high

Despite the continuing fall of commodity prices, the profit margins in resources like iron ore are still considerable and will remain so in the future, resource analyst James Wilson told MINING DAILY.

Despite the continuing fall of commodity prices, the profit margins in resources like iron ore are still considerable and will remain so in the future, resource analyst James Wilson told MINING DAILY.

“The margins are the thing you have got to look at, they are still awesome,” he said.

According to Wilson, of Perth stockbroking firm DJ Carmichael and Co., people have become too caught up in the gloom and doom of recent months.

“At the moment spot price is at US$82 a tonne, which is $130 Australian,” he said.

“Rio is still knocking out 170 million tonnes per annum and BHP is still doing 118 million tonnes with other expansions in the pipeline.

“They are producing anywhere from $15 to $20 a tonne, so there is still a shed load of margin in this.”

While demand from Australia’s biggest customers such as China has certainly slowed, that demand is all relative and still at very high levels, Wilson said.

“Everybody is saying that production is rotten and there might be a lower demand, but the Chinese are still picking a 460 million tonne production capacity this year of steel,” he said.

“In order to get that much steel you have to go and produce about 1.6 tonnes of iron ore for every tonne of steel, so they need about 800 to 900 million tonnes of iron ore.”

“It’s still very, very serious.”

Regardless of the current state of the market, higher levels of demand will return and higher commodity prices along with them, Wilson said.

“The demand for resources will continue,” he said.

“It’s an unassailable fact that they world will need resources down the track.

“It’s just a bit of a hiccup on the way at the moment.”

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