Big Pilbara party marked peak iron ore

Western Australia’s all-important iron ore industry, which underpins its economy, could be having its last hurrah in the current project-development cycle as a 20-year boom comes to an end.

For job seekers, mining professionals, investors and even Treasury officials, the signs all point to a peak in terms of opportunities, profits and royalty income.

Curiously, the key evidence of a slowdown cannot yet be found in the iron ore price, which remains robust at around $US115 a tonne, more than enough for every miner of the mineral to be handsomely profitable.

But it masks a widely anticipated fall to $US90/t or less.

The clues to an iron ore sea-change lie elsewhere, in events such as:

• Every big WA iron ore producer focusing on investments in other industries such as copper, potash, hydrogen and lithium. 
• Rapid and unsettling change in the executive ranks of Fortescue Metals Group as the company tries to adjust to a future with less exposure to iron ore. 
• The start of a squeeze on iron ore profits as the industry’s workforce is re-unionised under employment law changes, which have already led to warnings from big miners such as BHP that job losses and reduced investment will follow. 
• China hitting a steel consumption peak that will limit its consumption of iron ore, leading to a lower future price. 

While impossible to pin down a precise time of iron ore topping out, an obvious possibility is the 20th anniversary celebrations of FMG, which had the hallmarks of the type of party thrown in the 1980s by the late Alan Bond when he has a dominant figure in WA business – before the 1987 stock market crash.

Wild street scenes after Mr Bond’s team won the America’s Cup in 1983 were matched by a fireworks show over the Swan River for a private family wedding.

In FMG’s case, the iron ore party involved spending a small fortune on flying 700 guests to the Pilbara for a party in the outback while in thebackground the chief executive of just six months, Fiona Hick, was being shown the exit, followed by the chief financial officer of 90 days, Christine Morris.

More FMG departures before and after the party in the Pilbara underlined the significance of what’s really happening at the company, which no longer wants to be seen as an iron ore business because the future, according to its chairman, Andrew Forrest, is green hydrogen.

The big makeover at FMG is an obvious indicator of an iron ore peak because Mr Forrest senses an opportunity to be at the forefront of energy transition as fossil fuels are phased out and alternatives evolve.

For anyone working at FMG today the message is clear.

If you want to be part of the company’s future, jump across to Fortescue Future Industries, with the best clue to that advice being in the middle word of the name, Future.

Rio Tinto and BHP, the two biggest WA iron ore miners, have made it clear to employees and investors that they are more interested in “future facing” metals such as copper, nickel and potash, perhaps with a lick of lithium.

Iron ore will remain an engine room of BHP and Rio Tinto but the growth phase has ended, repeating previous periods of heavy capital investment in new mines followed by a long run of squeezing out the best in operational efficiency, which means employing fewer people as the business chases productivity improvements.

Gina Rinehart is starting to travel in the same direction, with her investments in oil and gas followed by a widely reported new-found interest in lithium.

There is a common thread connecting the diversification moves by all the iron ore miners, energy.

Mr Forrest thinks hydrogen will be the winner in a migration away from fossil fuels.

BHP and Rio Tinto believe the best way for a mining company to play the shift is through metals exposed to energy, with copper top of that list.

Mrs Rinehart likes oil and gas, perhaps with a lithium cherry on top.

What they are also trying to avoid is an inevitable profit squeeze flowing from a downturn in the price, which is expected to follow when China enforces steel production cuts caused by a significant slowdown in its export-focused economy.

Morgan Stanley, an investment bank, sees an iron ore price $US90/t before Christmas though it also acknowledges that the steel production cuts it has been expecting appear to have been delayed, which means the future price could be a little higher.

But even as a debate develops over what might happen in China, the costs side of iron ore are rising and will pick up speed with the new workplace laws designed to divert a greater share of company profits to unionised employees.

What’s happening in the WA gas export sector is a guide to what’s likely to happen in iron ore, with industrial action almost guaranteed as as employers and employees clash over the share of profits – with investors left to watch from the sidelines.

Citi, another investment bank, explored the cost issue in a research note sent to clients earlier this month with a warning that all producers faced cost increases, with the more important factor for investors being the profit margin per tonne, not the cash cost per tonne. 

On cash cost alone, FMG is the winner with Citi estimating it can produce a tonne of ore, over the long term, at $US19/t.

BHP’s long-term cash cost is estimated at $US20/t.

Rio Tinto is $US21/t.

But, after all costs are calculated and a discount applied to FMG’s lower-grade ore, it is BHP which generates the highest long-term profit margin of 33.2 per cent on its iron ore revenue.

Rio Tinto’s margin is said by Citi to be 31.4 per cent and Fortescue is the lowest at 28.3 per cent.

The importance of Citi’s calculations is that the bank assumes a long-term iron ore price of $US80/t but has not factored in the expected higher cost increases of a re-unionised workforce or from other cost increases such as an escalation in government royalties or other taxes.

Iron ore has been WA’s boom commodity since China embarked on its industrial revolution 20 years ago but the good times are clearly coming to an end.

For proof you only have to follow the money because the people with the greatest exposure to iron ore are not investing heavily in their own industry, they’re finding better opportunities elsewhere.

Perhaps you should too.