Is the Tipping Point for Iron Ore Miners Close By?
(Continued from Prior Part)
Sustainable iron ore price
As we saw earlier, analysts contend that while iron ore prices are expected to remain weak going forward for a few years due to the adjustment of supply and demand, the prices aren’t expected to remain below $40 per ton for any significant amount of time. Iron ore prices above $45 per ton should motivate even major iron ore miners to accelerate their brownfield expansions to fully optimize their infrastructure.
The sustainable iron ore price shouldn’t provide an incentive to miners to raise their capacities by more than they planned to in the iron ore boom era. This is especially true in the face of falling demand growth. So, sustainable iron ore prices should be somewhere in this range.
While iron ore prices could fall below $30 per ton in the short-term, Rio’s CEO points out that it’s still a “fantasy land” as it’s far from sustainable even for big miners. According to UBS, the breakeven price for BHP and RIO is $29 and $30, respectively, per ton.
Upside and downside
The downside risk to iron ore prices from here on is the further acceleration in cost-cutting by miners. Upside risks mainly relate to higher-than-expected demand growth from China.
This could be spurred by the Chinese government’s efforts to kick-start the economy by further devaluation or easing measures. Any major capacity curtailment, particularly from Roy Hill or Vale, could also lead to an upside.
Survival of the fittest
Many industry experts believe that China’s steel demand has peaked. So, the situation for iron ore miners is basically about the survival of the fittest. BHP Billiton (BHP) (BBL) and Rio Tinto (RIO) are among the producers with the lowest cost. Also, both hab strong balance sheet position. After Vale (VALE) completes its capacity expansion, it would be the producer with the lowest cost, and the capital expenditure needed for completing projects could lead to near-term pressure on the company’s stock price.
Fortescue Metals Group (FSUGY) needs to further lower its cost structure to sustain it in the long term, especially given its debt commitments. Meanwhile, Cliffs Natural Resources (CLF) would need to find buyers for its non-core assets and reduce its leverage to survive the downturn. Investors should note that CLF’s major market is the United States. The country shouldn’t be directly impacted by the seaborne iron ore trade.
BHP and RIO together form 6.2% of the SPDR S&P Global Natural Resources ETF’s (GNR) holdings.
For the latest updates, visit Market Realist’s Iron Ore page.
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