Australia’s iron ore producers, led by BHP Billiton (BHP), Rio Tinto (RIO) and Fortescue (FMG) face increasing pressure on profit margins in 2014 and into 2015 with global prices for the mineral forecast to fall because of sluggish demand and rapidly rising production.
The Bureau of Resources and Energy Economics (BREE), the Federal Government’s leading resource forecaster, sees the iron ore oversupply lasting until 2016 before it starts to ease a little.
But in the mean time prices will remain under pressure and close to and under $US100 a tonne for quite a while.
For investors that means they can’t expect fabulous results from the big miners over the next two to three years, unless there’s a sharp fall in the value of the Aussie dollar, which doesn’t seem on the cards.
That means the country’s trade account, which was boosted back into the black for the first time in two years in the March quarter of this year, will also come under pressure, especially if the value of the Aussie dollar remains around its current levels of 93 to 93 US cents.
But there is a small silver lining with BREE predicting that the surging output will not only boost competition among low-cost shippers, but it will force iron ore suppliers in China to close because they are too expensive (and lack the high quality ores available from Australia and Brazil).
BHP vs RIO 2Y – BREE cuts iron ore price forecasts
The Bureau forecast iron ore will average $US105 a tonne this year-it was around $US93 a tonne overnight, but spent much of the first four months of this year above $US100 a tonne). That’s down $US5 a tonne from the March forecast from BREE.
Next year the average price will fall under $US100 a tonne, to $US97 a tonne, down from $US103 a tonne in the March forecast. That means the Bureau reckons iron ore exporters and the country face a tough year of the global price rarely rising above $US100 a tonne, and at times dipping under$US90 a tonne, as it did two weeks ago.
"Lower iron ore prices are unlikely to affect the production rates of most iron ore mines in the Pilbara, which have some of the lowest production costs in the world," the bureau said, referring to the main mining region in Australia.
"At current prices a large proportion of China’s domestic production is still assessed as loss-making,’ Bureau forecast in its second of four reports it issues each year forecasting our mineral and energy exports.
Bree reckons exports from Australia will reach a record 680 million tonnes this year (up 17%) and jump 12% to a massive 764 million tonnes next year. In March, the bureau had estimated iron ore exports in 2014 at 687 million tonnes.
The value of iron ore exports this year will top the $A74 billion level, up from just over $A57 billion in 2012-13. In 2014-15 they are estimated to rise by just over $A2 billion to $A76.44 billion, according to BREE.
Bree reckons that if the same reforms in China that have pushed unprofitable steel mills to close are also applied to iron ore miners, it is likely that a number will close before the end of 2014.
"While this loss in supply should provide some price support later this year, it is unlikely to fully offset the substantial increase from Australia," it said.
BREE also said that although India had lifted controls on iron ore exports, not much ore was expected to come onto world markets with the Indian government and companies likely to divert ore to the rapidly growing domestic steel making industry which is now the world’s 4th largest producer and growing faster than China.
On the demand side, the news from BREE is sort of optimistic for Australia and other exporters, so long as world prices remain low.
"China is expected to remain the key driver of growth in world iron ore consumption in 2014 and its imports are forecast to increase 6 per cent to 869 million tonnes.
"Although growth in steel production is expected to slow in 2014, the proportion of domestically sourced iron ore used in China’s steel mills is expected to decrease due to the availability of cheaper imports from Australia and Brazil." This substitution towards cheaper seaborne iron ore is expected to continue in 2015, particularly if landed prices in China remain below US$100 for an extended period in 2014.
"At this price a number of China’s iron ore mines are unprofitable and are expected to close down.
"In 2014 Japan’s iron ore imports are forecast to remain broadly unchanged from 2013 at 136 million tonnes.
"Steel production at Japan’s mills is expected to moderate in line with subdued export demand for steel and steel intensive products.
"Japan’s imports of iron ore are forecast to grow by less than 1 per cent in 2015 and to total 138 million tonnes," BREE forecast.
BREE forecast that for the year to next Monday, June 30, the value of Australia’s resource and energy exports is estimated to have increased by 11% to $196 billion. That will slow to an increase of just 2.6% in 2014-15 to a total of $201 billion.
"Higher iron ore and LNG export volumes will be the main driver of this increase. The growth in iron ore export volumes will mainly be from recently started mines delivering a full year of production rather than new mines starting up in 2014–15, whereas the growth in LNG export volumes will come from new LNG plants starting production.
"The US dollar-Australian dollar exchange rate is a key risk to the forecast growth in export earnings and a higher than forecast exchange rate will result in lower export earnings," BREE remarked. How true and that’s a sentiment exporters, the Reserve Bank and the Federal Government will agree with.
