The great iron ore boom is over
Billions of dollars have been wiped off revenues of mining giants like BHP and Rio Tinto and from Australia’s trade account after the rout in global iron ore market accelerated on Thursday with prices seeing their largest ever one-day fall.
The size of the price plunge took traders by surprise, even though Wednesday had seen a sharp, 6% fall after prices had been stuttering lower since late June.
Wednesday’s slide saw the share prices of the major iron ore groups take a big hit – BHP shares lost 6.3%, Rio Tinto shares fell 5.7%, Fortescue Metals shares dropped 6.1% and shares in Mineral Resources slumped 6.6%.
For the five past trading days BHP shares are down 15.7%, Rio shares are off 11%, Fortescue shares are down 10.6% and Mineral Resources shares have dropped 12.7%.
Thursday’s plunge took prices to six-month lows as China’s push to cut carbon emissions by restricting crude steel output and a weakening pace of activity in the wider Chinese economy, saw double digit price falls on top of already big falls so far this month.
China produced 86.79 million tonnes of crude steel last month, down 7.6% from June’s 93.88 million tonnes and 8.4% from 93.36 million tonnes in July 2020. It is also down 13% from the all-time peak in May of 99.45 million tonnes.
The July figure was the first real confirmation that Chinese campaign to cut output in the December half was having an impact.
And the shares of those big exporters will take further hits on Friday in the wake of Thursday’s record slump.
Global prices had edged down on Monday and Tuesday of this week before dipping 6% on Wednesday and then plunging more than 13% on Thursday (for the 62% Fe fines product from the Pilbara). The 58% Fe fines product produced by the likes of Fortescue Metals lost more than 15% as did the 65% Fe fines product from Brazil.
MB Fastmarkets index price data shows the cost of the benchmark 62% Fe fines product shipped to northern China from WA’s Pilbara by the likes of BHP, Rio Tinto and increasingly, Fortescue Metals, lost $US20.73 or 13.5% on Thursday to end at $US132.66.
The 58% Fe fines blend from the likes of Fortescue slumped 15% or $US20 a tonne to $US103.46 while the price of the 65% Fe fines from Brazil shed $US27.30 to end at $US152.50 a tonne.
For August the key 62% Fe fines product has lost 27% so far, the 58% Fines product has slumped 29% as has the 65% Fe Fines from Brazil.
With 11 days left in August, this is already the largest monthly fall on record.
And prices are close to falling below levels a year ago – in fact the price of the 58% Fe fines product is $US11 a tonne under the year ago price of $US114.95. 62%Fe fines.
The falls seen this week cap a slide that start in May after prices hit all-time highs. The collapse has accelerated as it became apparent that China was determined to cut carbon emissions by forcing production cuts on the steel industry in the December half after production surged 12% in the first six months of this year.
The price collapse is bad news for the earnings of giants BHP and Rio Tinto which have just revealed record revenues, profits and rewards for shareholders.
It is also bad news for Fortescue Metals which is about to announce record earnings and rewards for shareholders, led by chair Andrew Twiggy Forrest.
Those earnings are now all interesting history – the three companies are looking at large falls in iron ore earnings as the 2021-22 financial year heads towards December 31 and the end of the Rio full year and half years for BHP and Fortescue.
Since June 30 iron ore prices have slumped 37% in the first month and a half of the 2021-22 financial year for 62% Fe fines and by 43% for 58% Fe fines. Fortescue’s average price in 2020-21 was $US135 a tonne, so at just over $US103 a tonne on Thursday, Twiggy Forrest’s company and his fortune will take a big hit to revenue, profits and dividends.
Mineral Deposits and Arrium will also feel the pain with the prices for their lower grade iron ore exports take a big hit as well.
But for BHP and Rio (and the likes of Newcrest, Evolution, Oz Minerals and others) word copper prices have also slumped – the Comex front month price was around $US4.04 a pound on Friday morning (in Asia) down on the day and down nearly 7% in the past month and now around 70 US cents under the peak in May (which helped those miners report record copper earnings for the June 30 half or full year).
This is all bad for the federal budget’s tax receipts as iron ore revenues are a proxy for nominal GDP growth. It’s also bad news for the west Australian government because its surplus is about to disappear.
The days of record trade surpluses has gone. Australia exported $152 billion worth of iron ore in 2020-21. It will be lucky to stay above $100 billion worth this financial year the way global prices are sliding.
