Wednesday 23rd October 2019

Resource Clips

Dumping iron

How long can Rio, BHP and Vale continue their quest for world domination?

by Greg Klein

He must have had trouble blinking back the crocodile tears. There was president Jimmy Wilson of BHP Billiton’s (NYE:BHP) iron ore division earlier this month talking about how his company, like others in that commodity’s Big Three, continues to increase output dramatically, even as prices remain near five-year lows and higher-cost competitors struggle. “We take no joy from that,” he claimed.

Must be rough. But rationalization came from Big Three brother Rio Tinto NYE:RIO. “If it is not us putting in the highest-margin [lowest-cost] iron ore on the planet’s surface, then it is available to others,” the Sidney Morning Herald quoted Andrew Harding, chief executive of Rio’s iron ore unit.

Can Rio, BHP and Vale continue their quest for world domination?

As the world’s top steelmaker, China benefits from low iron ore prices
even though they threaten its domestic and overseas mining.

By 2020 Australia and Brazil are projected to supply about 90% of global supply, according to Macquarie Group figures quoted by Bloomberg. Most of it will come from the BHP, Rio and Vale NYE:VALE Axis of Iron. Whether those companies can—or are allowed to—come so close to world domination remains to be seen. But today’s situation is a far cry from 2011, when China wanted to break the Big Three’s grip on supply to bring down the much higher prices then prevailing.

That was when iron ore was going for about $170 a tonne. The Big Three supplied about 62% of Chinese imports. Now the price lies closer to $80 a tonne, a 41% drop this year alone according to Bloomberg and the lowest since 2009. Standard & Poor’s foresee an $85 benchmark to 2016, stated another Bloomberg dispatch. Although China relies on the terrible trio more than ever, the country must be happy about the prices. But among the supposed targets of the giants’ expansion are higher-cost Chinese producers as well as overseas projects with heavy Chinese investment.

The three seem relentless. The Wall Street Journal reports BHP’s goal to hit 290 million tons in 2017, more than 22% above the company’s last fiscal year. As for Brazilian Vale, “the world’s largest iron-ore mining company plans to boost output to 450 million tons by 2018 from 306 million last year,” added the WSJ. “Rio Tinto, meanwhile, produced 266 million tons last year and is targeting 360 million tons in the next few years.”

Macquarie predicts Australia and Brazil will produce 79% of global supply next year, up from 73% last year. By 2020 the amount could reach 90%.

Bloomberg also reported, “The global surplus will more than triple to 163 million tons next year from 52 million this year, according to Goldman Sachs Group Inc. It projects an expansion to 245 million tons in 2016, 295 million tons in 2017 and 334 million tons in 2018.”

Not all of it will come from the Big Three, however. Among other significant suppliers are Anglo American and Fortescue Metals Group. In an October 17 Mining Weekly story, the latter’s CEO Nev Power lashed out at his Australian rivals, accusing them of a “foolish strategy” and “one that will inevitably lead to self-inflicted wounds, minimal returns to shareholders and probably replacement of the management teams, like we’ve seen from some of those companies in the past.”

Later that day Rio’s Harding hit back. “I don’t feel at all worried about my job but it is clearly on the top of the mind for him,” the Sidney Morning Herald quoted him. Claiming to produce higher-quality ore at much lower cost, he added, “I can understand why Nev is actually a little distressed and possibly even panicking.”

Other companies are worried too, from majors to juniors. While Power and Harding were exchanging shots, Cliffs Natural Resources NYE:CLF announced low prices will bring an expected $6-billion Q3 write-down on some of its coal and iron ore assets. ASX-listed Atlas Iron, a miner in the same Western Australia Pilbara region worked by Rio and BHP, last month joined Fortescue as one of Australia’s worst victims of short-selling, once again according to Bloomberg. Around the same time Australian Mining reported hundreds of layoffs from Atlas.

Earlier this month Newfoundland and Labrador Hydro suspended work on its $300-million transmission line to Alderon Iron Ore’s (TSX:ADV) Kami project in the Labrador Trough. The St. John’s Telegram attributed the decision to “fallout from the current state of iron ore prices.” The announcement came just days after Cliffs shut down the region’s Wabush mine, throwing about 500 people out of work. Yet Alderon’s executive chairperson Mark Morabito remains resolute about Kami, which has a feasibility study projecting a 30-year mine life. “It’s just a pause and this is the mining business,” he told the paper.

“The bottom line for Alderon is this is a campaign, leveraging the Chinese slowdown, by the Big Three, to drive Chinese domestic supply out of the market. It is a campaign. It will end at some point,” the Telegram quoted him. He expects the effort to last “another year or so.”

Are the Big Three taking any risks themselves? One person who thinks so is Colin Barnett, premier of Western Australia, where BHP and Rio get most of their iron ore.

As the Financial Times pointed out last week, “Western Australia is heavily reliant on royalty and tax revenues from iron ore and is implementing tough budget cuts in the wake of a dip in commodity prices.”

The FT added Barnett would “hate” to raise royalties. But the premier suggested that’s a possibility the cost-conscious companies can’t ignore.

According to Forbes, Barnett also suggested the miners might provoke strong repercussions. “If I was sitting around a board table in one of those big companies I’d be pretty nervous about what the WTO and European regulators would think about this.”

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