The iron ore war is low key today for the first time in some weeks but it persists a little below the radar. From The Australian:
The industry’s attack on costs and productivity has clawed back an estimated $20 billion in margins that evaporated when iron ore began a steep retreat from $US90 a tonne in September last year to a low of $US46.70 a tonne on April 2.
While the iron ore war between Fortescue’s Andrew Forrest on one side and Pilbara heavyweights Rio Tinto and BHP Billiton on the other has been raging in that period, the real story has been the success the entire industry has had in cutting break-even costs.
Analysis by UBS shows that the break-even all-in cash cost of the entire local industry is — currently at least — sitting comfortably below the spot price of $US61.40 a tonne.
It has been a good effort but to no avail. So long as the glut lasts these cost savings will simply be recycled as cheaper iron ore for China in due course. That’s the real story.
We are in a market share battle and the winners will be the cheapest producers. If the entire sector shunts its costs lower that achieves nothing.
More interesting is who will survive that battle long term. Anglo and Kumba (the same firm) have a lot of cost reduction ahead as Minas Rio ramps up and unit costs fall. It also has deep pockets to survive a long and bloody war. Ferrexpo has good ore and markets much closer to Ukraine that it could dominate. Everyone else left of FMG on the chart is doomed in the seaborne market.
More interesting is whether FMG can out-compete Vale. It says so:
Fortescue Metals Group has disputed a claim by a Chinese steel official that its high costs and debt require a fresh equity investment, arguing it has a lower break-even price than Brazilian giant Vale and is catching up to local rivals Rio Tinto and BHP Billiton.
Australia’s third-largest iron ore miner has pledged to cut its break-even price to $US41 ($53) a tonne in the next three months, from $US60 a tonne late last year, and says it can get down to $US39 a tonne by the end of the 2016 financial year.
Vale had a break-even price of $US45 a tonne in the March quarter that is expected to reduce to about $US43 a tonne by the end of the June quarter.
Fortescue chief financial officer Stephen Pearce said it has a cost structure superior to Vale’s, and believes some investors have failed to recognise this.
Perhaps true for now but not longer term. The Valemaxes are going to chop $5 per tonne from Vale’s costs. S11D will hugely lower unit costs. Cheap debt from China will help lower the interest bill. And Vale has higher cost production it can pare as well. Vale cost-out is a long and impressive pipeline.
FMG, on the other hand, is high-grading to survive. It’s overburden removal has collapsed 25% in recent quarters and it will exhaust it’s best ore first before unit costs begin to rise. It has expensive debt (which could be an advantage if it can lower it) and a lousy balance sheet.
My own view is that this is all rather academic given my outlook that the Chinese steel market is going to fall away quite fast and with it demand for seaborne iron ore. Such assumptions pretty much make FMG survival impossible. But there is one way to give it a chance – without giving it to the Chinese and destroying BHP and RIO pricing power in the process – and it is to reverse this:
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
The industry’s attack on costs and productivity has clawed back an estimated $20 billion in margins that evaporated when iron ore began a steep retreat from $US90 a tonne in September last year to a low of $US46.70 a tonne on April 2.
