13/11/2014 - 14:00

Too many irons in the fire

13/11/2014 - 14:00

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For the best ringside seat at a bruising encounter don’t buy a ticket to a boxing event, sign up for an iron ore forecasting conference which will, for the first time since prices crashed, put the big boys of the industry on the same podium as the small producers.

Too many irons in the fire

For the best ringside seat at a bruising encounter don’t buy a ticket to a boxing event, sign up for an iron ore forecasting conference which will, for the first time since prices crashed, put the big boys of the industry on the same podium as the small producers.

The annual Global Iron Ore & Steel Forecasting Conference is normally a sedate affair, with optimists and pessimists batting their predictions around in front of about 500 delegates.

The 18th version of the talkfest to be held at the Pan Pacific hotel in early March 2015 promises to be far from gentle, and might start without some of the people currently named as speakers – especially if the iron ore price continues its downward trend, as major sponsor, Citigroup, says it will.

While other investment banks share the gloom evident in Citigroup reports for the past year, none is quite as gloomy and none has been so consistently correct.

Just before the 17th conference held in April this year, leading Citigroup analyst Clarke Wilkins distinguished himself by publishing a negative report on iron ore a few days before he appeared as a keynote speaker.

Back then, when the iron ore price was around $US118 a tonne, Mr Wilkins upset the Western Australian iron ore industry by predicting a price of $US90/t by 2015, and then down to $US80/t in 2016.

In hindsight he should have been gloomier, which is possibly why a Citigroup colleague, Ivan Szpakowksi, has been handed the bank’s sledgehammer in a fresh report, which smashes the iron ore sector with a forecast that includes a price dip below $US60/t.

“We expect iron ore price to fall into the $US50s,” Mr Szpakowksi wrote in this week’s report on the sector from Citigroup.

Interestingly Mr Szpakowski and Mr Wilkins are listed as speakers at the March iron ore forecasting conference, along with most of the big names in the industry.

Rio Tinto Iron Ore boss Andrew Harding shares top billing with BHP Billiton Iron Ore president Jimmy Wilson, along with WA Mines Minister Bill Marmion.

Given the WA government’s view, as expressed by the premier, Colin Barnett, that the iron ore “market flooding” tactic of the two big producers is damaging WA, it will be interesting hear whether Mr Marmion agrees.

More importantly, it will be amusing to watch how the minister applies his political skills in managing a meeting that has the potential to become a name-calling showdown between big, low-cost, miners and speakers for small, high-cost companies peering into the abyss of financial failure.

If that sounds an extreme view then consider the four small, high-cost, iron ore producers which have already collapsed, and then factor in that sub-$US60/t Citigroup price forecast.

For people such as Ken Brinsden from Atlas Iron, Morgan Ball from BC Iron, and Jim Beyer from Mt Gibson, the challenge of being on the same podium as Mr Harding and Mr Wilson will be tough enough, but to have the Citigroup speakers trundle out their latest dose of price-gloom really is salt in the wound.

Whether Citigroup will be holding the same view in March as is does today will be interesting to hear but, if the bank retains its depressed outlook then it is possible that some of the smaller miners will be casualties of the price slump and quietly disappear from the conference speaker’s list.

Citigroup’s view of the market is concerning on a number of levels other than the price tips, including observations that:

• rather than fall with the price, seaborne iron ore production will rise by 140mt next year with 54mt extra coming from Rio Tinto, 15mt from BHP Billiton and 7mt more from Fortescue Metals Group, plus the start-up of the Roy Hill mine in WA and the Minas Rio mine in Brazil;

• meaningful production cutbacks are unlikely until the price falls into the $US60/t range;

• prices need to be below the cash cost of producers for a prolonged period to induce significant cuts; and

• supply is proving to be more resilient than the market appreciates.

If Citigroup is right, as it was earlier in the year, the scene has been set for a red-hot iron ore forecasting conference; and while it will be the smaller miners feeling most of the heat, it would not be a surprise if the big miners find themselves confronting vocal criticism from their own shareholders.

What Mr Harding and Mr Wilson might be asked to explain is how long they’re prepared to flood the market in order to kill rival producers, and whether they too will be forced to curtail some of their own high-cost operations, such as those at the Rio Tinto-controlled Iron Ore Company of Canada.

In the half-year to June 30 the 58.7 per cent-owned Canadian business reported an 18 per cent fall in net earnings to $US97 million, pointing to a thin margin of 11 per cent on sales totalling $865 million.

With iron ore having fallen into the $US70/t range and heading for a sub-$US60/t level, it is likely that the IOCC is struggling to post profits.

If that is the case then Rio Tinto’s role as market flooder could prove to be one of the mining industry’s more damaging exercises in foot shooting.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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