12/03/2015 - 13:43

Iron ore going from hero to zero?

12/03/2015 - 13:43

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You don’t need to listen too closely to hear the pips squeaking in Western Australia’s iron ore lemon after a week-long debate about the state’s most important industry, which appears to be heading for a crisis that will hit companies and governments in equal measure.

You don’t need to listen too closely to hear the pips squeaking in Western Australia’s iron ore lemon after a week-long debate about the state’s most important industry, which appears to be heading for a crisis that will hit companies and governments in equal measure.

As was expected at the annual Iron Ore & Steel Forecast Conference on Tuesday and Wednesday, there was a clear demarcation between the two biggest miners, Rio Tinto and BHP Billiton, and the rest of the industry.

Boiled down, the key point of dispute was whether the big two, with a little help from Fortescue Metals Group, were deliberately flooding the iron ore market as a business tactic designed to snatch a bigger share of the market (while also destroying small rivals).

Spokesmen for the big companies deny the charge, as expected, while spokesmen for the small companies, with the aid of a visiting American, arced up the rhetoric.

Lourenco Goncalves, chief executive of US-based Cliffs Natural Resources, described the high (and rising) levels of production by the big miners as “self-destruction”, while also tossing in a suggestion that, if iron ore drops to $US50 a tonne, Australia itself might “go out of business”.

The American, obviously, is annoyed that his business is in trouble, at home and abroad. The problem at home is a result of the strong US dollar, which means Canadian iron ore is stealing market share, while the problem abroad is that the big Pilbara producers are crushing Cliffs’ Koolyanobbing mine in WA – just as happened in the 1970s when owned by BHP Billiton.

What the angry American has also done is overcook his case, because the latest trade data show that iron ore has already slipped below tourism, education and other services as Australia’s biggest export industry.

Iron ore miners face a tough future, forced to live with the fact that they have become less important than they were a few years ago, and will become even less important over the next few years because the boom is over and will not return soon.

That undeniable fact is also something the WA government needs to learn as it tries to rebalance a budget that had become over-reliant on iron ore royalties, with their decline (or lack of growth) causing other parts of the mining industry, especially gold, to feel the chill wind of an extra tax slug.

Because it is pointless to indulge in a game of finger pointing, and because it is possible to see both sides of the debate about excess supply of iron ore, it’s time the discussion moved on to identify the flash points that could inflame the situation.

• FMG trying to refinance part of its heavy debt burden, but with reports flowing back from the US that investors are wary of the terms being offered, news that sent FMG’s shares down to a 12-month low on Wednesday of $1.89, which is one-third of the $5.73 peak reached 11 months ago.

• Gina Rinehart blaming government for inflicting high costs on local miners, a claim that may have some truth to it but sounds too much like an excuse for problems at her Roy Hill project, which will start exporting into a depressed market, possibly making the early years more difficult than she ever imagined.

• Atlas, BC Iron and Mt Gibson complaining loudly about the problem of being relatively high-cost producers in a falling market, with every moan seemingly greeted by a fresh fall in their share prices; the collective value of all three is now at just $434 million, which is $200 million less than copper mine, Sandfire, or one-third the $1.2 billion value of mining services company, Mineral Resources.

Iron ore, especially the seaborne trade side of the business, was once suitable only for very big companies operating very big mines and highly efficient rail and port systems

It is returning to those roots, as was acknowledged a few days ago by one of the smartest men in the mining world, Ivan Glasenberg, the chief executive (and major shareholder) in Glencore, who quietly dropped an iron ore project in the West African country of Mauritania.

What’s so interesting about the dumping of the Askaf project is that it was less than 12 months ago that Glencore reportedly paid $US1 billion for the project.

There is a very loud and clear message in Glencore’s Askaf exit and that is that the world’s biggest commodity trader has lost interest in iron ore, as have most Australian investors.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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