iron ore news

Iron Ore — Australia’s biggest export earner — has sunk 33 per cent, or $US44.70 a tonne, below last year’s average due to mounting supply from Australia and elsewhere hitting the seaborne market at a time of slowing Chinese demand. Should iron ore’s current price of $US90.30 a tonne become the norm for the year, Australia’s producers will be dealt a collective $US30 billion ($32.5bn) revenue hit. Higher-cost producers like Cairn Hill are buckling under the pressure.

Much bigger producers such as Rio Tinto, BHP Billiton and Fortescue are largely insulated from the price crash because of their lower cost of production. But investors are increasingly wondering whether the price decline will also squeeze plans by BHP and Rio to step up shareholder returns, and Fortescue’s plan to slash its debt levels. The federal government would also have to pencil in lower tax receipts.

More immediate pain is being felt by the workforce at Cairn Hill, 55km southeast of the opal mining town of Coober Pedy. Operations at Cairn Hill — where production started in December 2010, when iron ore prices hit a bonanza $US170 a tonne — were stopped on Wednesday, affecting 200 jobs.

Martin Lewis from Ferrier Hodgson has been appointed administrator of the mine’s operating company, Termite Resources. Termite is owned 51 per cent by ASX-listed IMX Resources and 49 per cent by China’s Taifeng Yuan Chuang International.

Mr Lewis said in a statement that it was too early to assess the outcome of the administration. He confirmed the operation had been shut down.

“Negotiations with key stakeholders and suppliers are continuing and we expect a final decision on the future of the mine and its 20 permanent employees will be made in the coming days,’’ Mr Lewis said.

IMX said that all undisclosed contractual liabilities for Cairn Hill mine were the obligation of Termite, except for a guarantee provided by IMX under the port-handling services contract with Flinders Ports. “This guarantee is capped at $3 million. IMX has held preliminary discussions with Flinders Ports and is confident that a mutually acceptable solution can be reached, should there be any claim under the guarantee,” the company said.

Mine capacity at Cairn Hill is 1.7 million tonnes per annum of a magnetite-copper product.

The joint venture reported negative cashflow from operations of $1.4m in the March quarter. All up, costs in the quarter were $104 a tonne.

On last year’s average prices, the margin for the business was healthy. But it has since been wiped out by iron ore’s price fall.

The joint venture only announced a life extension for Cairn Hill in April. IMX chief executive Gary Sutherland said that had been based on consensus at the time (by more than a dozen analysts and commodity forecasters) that iron ore would trade at $US120 a tonne.

Consensus around the exchange rate was for a future price of US90c. But the dollar has held on to its revenue-sapping higher levels, and was at more than US94c yesterday. IMX shares fell 37 per cent to 2.5c, valuing the company at $9.9m.

The company’s other interest is a big-spending nickel exploration hunt funded by Chinese-controlled MMG in Tanzania.

SA Treasurer Tom Koutsantonis said the resources sector had faced fluctuating commodity prices and a high dollar.

He said SA had done much to grow the industry “but we recognise we can and we must do more”. Another $44m in resource sector initiatives was contained in SA’s budget yesterday.

Despite the iron ore price plunge, the Reserve Bank yesterday said growth in infrastructure investment in China is likely to remain strong for some time, which will have a positive impact on Australian commodity exporters

iron ore kuantan

Benchmark iron ore declined for a second day in a row on Tuesday, as the rally in the steelmaking raw material from near 18-month lows runs out of steam.

According to data from the The Steel Index, the import price of 62% iron ore fines at China's Tianjin port was off slightly to $93.60 per tonne on Friday, down $0.70 on the day.

The iron ore price fell to its lowest level since September 2012 on May 30 and the commodity remains 30% below levels at the start of year.

The weakness in iron ore in 2014 is blamed on expectations of a glut on markets just as demand from China, responsible for two-thirds of the 1.2 billion tonne seaborne trade, cools.

Iron ore has not trade below $100 on a quarterly basis since 2009 and when prices stay below this level for long enough high cost mines, particularly those in China, become unprofitable leading to cuts in supply.

During the September 2012 slump down to $86.70, number two producer Rio Tinto estimated as much as 100 million tonnes output were taken off the table, which pushed prices back up.

A new report from investment bank Citi argues the price won't go below $90 and is set to re-enter triple digits before the end of the year according to investment blog Barron's:

The biggest reason for the large decline in iron ore prices this year has undoubtedly been the rapid growth in supply from Australia and other exporting nations. However, we continue to believe that this surge in supply is peaking in Q2 and that the second half of the year should see a leveling off in supply.

In fact, export volumes out of Australia have leveled off in recent weeks after the explosive growth seen in February through May. We expect Q3 exports to remain relatively flat before a seasonal upturn in Q4 (far less pronounced than the surge seen last year). Exports out of Brazil have admittedly increased rapidly over the past month (partly helped by resolution of difficulties at CSN’s port), but such gains should moderate and in the short-term be partially absorbed by stockpiling at Vale’s new Malaysia logistics center.

A complicating factor in 2014 may the popularity in China of using commodities – particularly iron ore and copper – as collateral for trade credit.

Demand driven by financing deals help explain why import of copper and iron ore have been so strong despite the slowdown in the world second largest economy. While iron ore imports slowed to 77.4 million tonnes in May, down 7.2% and copper imports fell 15.6% from a month ago to 380,000 tonnes, year on year imports are still expanding at a rapid rate.

Stockpiles of imported iron ore at Chinese ports are at record highs above 110 million tonnes according to industry consultancy Steelhome, up more than 50% from this time last year.

Some estimates put the portion of iron ore inventories that is used as collateral for short term loans at 40%, but Beijing is cracking down on the practice as it tries to rein in the country's vast shadow banking system and tackle excessive debts in the economy.

Beijing's tightening of controls coupled with a weakening yuan – another deliberate move by authorities – are pushing these deals under water and much of that ore could find its way back onto the market creating a vicious circle.

Iron ore deals are also being targeted to reduce chronic overcapacity in China's steel industry and in the process tackle polluting sintering plants and blast furnaces.

Combined with a probe into multiple pledging of inventories at the Qingdao port could see vast quantities of iron ore and copper dumped onto already soft markets says a report by UBS:

The typical iron ore collateralised loan has a 3-month duration (unlike the usual 6 months for copper). If banks increasingly prevent traders from rolling over collateralised loans in the coming months, the risk of inventory liquidation increases and possibly coinciding with a seasonal slowdown in iron ore demand.

iron ore

The global seaborne iron ore glut will probably be 21 percent bigger than forecast next year as steel production slows in China, the world’s largest consumer, according to Goldman Sachs Group Inc.

The surplus will reach 175 million metric tons in 2015, compared with a prior prediction of 145 million tons, Goldman Sachs said in a report dated yesterday. The bank estimates that output will exceed demand by 72 million tons and prices will average $109 a ton in 2014, before dropping to $80 next year.

Iron ore has slumped 27 percent this year as economic growth in China slowed and mining companies from BHP Billiton Ltd. to Rio Tinto Group in Australia boosted output, shifting the global seaborne market into a glut. Banks from Standard Chartered Plc to Credit Suisse Group AG say more Chinese steel mills will go bankrupt and hurt consumption.

“The market is no longer in balance but in the early stage of a structural surplus,” analysts including Christian Lelong wrote in the report. “China will not act as the safety valve in an oversupplied market for much longer.”

Ore with 62 percent iron content delivered to the Chinese port of Tianjin fell 1 percent to $97.50 a dry ton yesterday, the lowest level since September 2012, according to data from The Steel Index Ltd. The decline in iron ore, Australia’s biggest export earner, pulled the country’s dollar today to the weakest level since May 2.

iron ore news

Most purchases are private, with little data on the volumes affected, but traders at Asian trading firms say they are seeing a sharp rise in canceled contracts this year while other buyers are demanding heavy discounts.

The U.S. Department of Agriculture confirmed that China has canceled orders for 517,000 metric tons of soybeans, used to make cooking oil, and compares to imports of 63.4 million tons last year. South American soybean contracts have also been canceled because of weak demand, says trade journal Oil World.

The cancellations are a big worry for the commodity markets as exporters around the world had relied for years on China’s insatiable appetite for a wide range of raw ingredients. But now as jitters rise over the health of the economy, the fallout is rippling through into agricultural commodities, just weeks after the price of copper and iron ore tumbled on worries they had been used in risky Chinese financing deals.

…Natural rubber, mostly grown in Southeast Asia and used to make products ranging from tires to latex gloves, is also getting hit as some buyers from China refuse to honor existing agreements, or look for ways to negotiate discounts. Two large Asian rubber producers, who asked not to be named, said Chinese buyers had defaulted on them.

Traders say buyers are trying to ask for discounts, citing reasons such as cargo arriving a few days late and claims about poor quality or contamination, said Bundit Kerdvongbundit, vice president of Von Bundit Co., Thailand’s second-largest natural rubber producer. The contracts are already signed, but Chinese importers “refuse to take cargo or pay unless they get discounts.”

One comfort is that most companies trading with China have taken some sort of safeguards after widespread defaults in the wake of the 2008 global financial crisis, like asking for deposits, said Benson Lim, chief operating officer and head of global rubber trading at R1 International.

…However, “the business is so competitive that not all sellers are taking deposits, so they are hard-hit when buyers default,” he added.

Rubber prices have dropped more than 20% since the beginning of the year, due to worries over China’s slowing economy and a global surplus of the commodity. Many sellers who bought at high prices are unwilling to sell at a loss, pushing up stocks at the port of Qingdao to near-record levels recently. Stockpiles in some other commodities like soybeans and iron ore are also high as buyers hang on.

…”The number one problem is weak demand from the credit tightening last year and real estate which has a direct or pass through effect on all of this activity,” said Shanghai-based Citi Research commodities strategist Ivan Szpakowski.