27/01/2015 - 16:26

Iron ore uncertainty inevitable

27/01/2015 - 16:26

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The falling price of iron ore is putting substantial pressure on local miners, particularly small and mid-sized players, but the price of the bulk commodity is still well above levels achieved just more than a decade ago.

The falling price of iron ore is putting substantial pressure on local miners, particularly small and mid-sized players, but the price of the bulk commodity is still well above levels achieved just more than a decade ago.

While the ore’s price alone is not the final word on profitability or otherwise, particularly when wild currency fluctuations are brought into the mix, it’s instructive to consider prices as recently as 2001 in terms of current market expectations.

Last week brought more grim news for the sector, with mid-tier miner Atlas Iron updating the impact of the recent price slide on its profitability, while Chinese magnetite producer Citic Group announced a forthcoming impairment of up to $1.8 billion.

In its December quarterly report, Atlas said its all-in cash cost was $66 per wet metric tonne, while its net sale price was $63, leading it to target continued cost reductions.

On Thursday, Atlas was 86 per cent below its 12-month high, when it reached $1.19 per share, while other WA mid-tiers BC Iron and Mt Gibson Iron were down 91 per cent and 82 per cent from their recent peaks respectively.

The miners’ fortunes have been hit hard by a near halving in the $US iron ore price since the beginning of 2014, despite a concurrent fall in the $A (which has somewhat softened the impact).

However, current values around $US67 are well above the level of the past three decades.

From 1984 to 2001, the iron ore price was effectively unchanged, around $US12 in real terms, with a brief peak around $US15 in 1991.

That period was an historical outlier, according to research from Credit Suisse, which found that prices had generally fluctuated around $US80 per tonne in 2010-dollar terms for most of the 20th century.

The iron ore price was close to $US13 after adjusting for inflation in 2001, climbing to peak at $181 a tonne in September 2011, an increase of 1,000 per cent in a time span of about 10 years.

The substantial rise of the Australian dollar, from below 48 cents in April 2001 to parity in 2010, moderated the increase in iron ore prices from the perspective of Australian miners, yet the impact was still tremendous, with new players entering and existing participants expanding capacity.

HSBC said the increase in production volume, and a similar increase in Brazil, were the key reasons for the drop in prices per tonne.

“As Australia is the world’s largest exporter of iron ore, a strong rise in (domestic) production affects global prices,” the bank said.

“Although we remain optimistic that commodity prices will stay historically high … prices are still expected to be lower than previously thought.”

Data compiled by Canadian economist David Jacks from the Simon Fraser University suggested that commodity price super-cycles could be decades long.

“(Commodity super-cycles) are demand-driven episodes closely linked to historical episodes of mass industrialisation and urbanisation, which interact with acute capacity constraints in many product categories in order to generate above-trend real commodity prices for years, if not decades on end,” Professor Jacks said.

The impact of Chinese growth might yet be replicated by India.

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