The toughness of the iron ore market and staying competitive was underlined yesterday in the quarterly report from Arrium (ARI), the steelmaker with a shrinking iron ore mining and export operation in South Australia (the old OneSteel).
The report clearly shows that Arrium lost around $8.90 for each tonne of iron ore it sold in the March quarter, thanks to the rapid drop in global iron ore prices which ran ahead of the company’s ability to cut costs.
Arrium’s quarterly mining report, released yesterday, indicates that the company’s total cash cost for each tonne of ore mined in the three months ended March 31 was $66.90, but the group’s average realised sales price was just $58 a tonne.
In the three months to the end of March, Arrium shipped 3.064 million tonnes of ore, down 7% on the prior corresponding period. However year-to-date ore shipments in the nine months totalled 9.8 million tonnes, up 5% on the prior period. So the loss was close to $27 million for the quarter.
“Bearish sentiment to Chinese steel production and concerns regarding increased supply from the majors [BHP Billiton and Rio Tinto] has weighed heavily on iron ore markets,” Arrium said in the report.
"The sustained decline in pricing has forced producers to rapidly reduce costs with many high cost producers being displaced from the market."
During the quarter the benchmark iron ore price averaged $US62 a tonne, a $US12 drop on the previous quarter.
ARI 1Y – Arrium losing $8.90 for every tonne of iron ore sold
The ore that Arrium mines in South Australia (near Whyalla, where its steel operations are located) is lower grade than the benchmark and therefore attracts a discount to the benchmark price.
Arrium’s ore had an average grade of 59.1% in the March quarter – the benchmark price is based on Pilbara iron ore with an iron content of 62%.
In US dollar terms, Arrium’s average realised price during the quarter was just $US46 a tonne, down from $US64 a tonne. In Australian dollars, Arrium’s average price for the quarter was $58 a tonne.
“The substantial decline in price during the quarter adversely impacted Arrium’s average price as a percentage of the average Platts 62% Fe index,” Arrium explained yesterday.
“This is due to customer pricing arrangements where sales are provisionally recognised by Arrium and then subsequently adjusted on settlement using prices at that time. In addition, shipments that have not settled within the quarter are provisionally recognised at end of month March prices.
"This has resulted in both prior period and current period adverse price adjustments and low provisionally recognised prices for shipments that will settle in future periods,” the company said in yesterday’s report.
Arrium said "Given the further decline in iron ore prices since the Mining business re-design changes were announced in January, further work is underway to identify volume/grade/cost options to optimise the Middleback Ranges operations in the current price environment.”
For that reason, the company believes its continuing cost-cutting program will help its discount to the benchmark price will narrow going forward.
Arrium shares lost more than 11% to end at 15c on the news of the losses in the quarter, and continuing concerns about the performance of its steel businesses.
