04/05/2015 - 16:47

Price relief for iron ore miners

04/05/2015 - 16:47

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AN iron ore price bounce of almost 30 per cent from 10-year lows earlier this month will no doubt bring some relief to many in the industry and in the Department of Treasury.

After months of worsening news and dire predictions about the direction of the price, a rally in the bulk commodity has potentially put some small operations back in the money, leading to gains on the ASX.

Fortescue Metals Group is one such mover, trading around 20 per cent above its 52-week low, set in April, at the time of writing.

In its recent March quarter report, Fortescue flagged a break-even cost of around $US39 per dry metric tonne, based on planned reductions to C1 costs of around $US5-$6 to $US18/dmt.

C1 cash costs are production costs excluding items such as royalties, depreciation and administration expenses.

The modelling will also rely on an exchange rate of US77 cents per Australian dollar.

As part of this pursuit of cost reduction, Fortescue last week made 200 workers on its Cloudbreak and Christmas Creek mines redundant.

Mt Gibson Iron has also enjoyed a bounce, trading at 20.5 cents per share at the time of writing, or about 17 per cent above its recent 52-week low.

The small miner said it was cash flow positive in its recent quarterly report, with C1 costs around $47.80 per wet metric tonne, falling to $43.80 in the month of March.

It too turned to labour costs to make savings, with a headcount reduction of 19 per cent in the quarter.

Global forces

The key demand factor in global iron ore markets is steel production, particularly in China.

In the March quarter this year, global steel production was a touch under 400 million tonnes, according to the World Steel Association.

That is down around 1 per cent on the same period in 2014, when production was 405mt.

Chinese production was also around 1 per cent lower, at 200mt for the quarter.

However, in a worrying signal about the health of the Chinese steel industry, producers are receiving substantial government support.

Late last year, Reuters calculated that about 80 per cent of profits for listed Chinese steel mills were funded by government subsidies.

Miners, too, are getting a light touch from the Chinese government.

The nation’s state council recently announced it would reduce tax on miners by around 40 percentage points, estimated to be worth around $US1-4/t for high-cost Chinese miners.

 

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