Miners making hay as iron ore price surges

Nick Evans article courtesy of The Australian  – Business Review – July 4, 2019


Iron ore prices are on the verge of beating the peaks reached during the mining boom of 2011, in Australian dollar terms, and have some headroom for further rises, analysts predict.

The headline price of Pilbara iron ore, sitting just below $US125 a tonne, is unlikely to ever top the highs of $US185 it reached in early 2011, when the Aussie dollar was trading one-for-one with the greenback.

But record low interest rates in Australia have weakened the value of the Aussie, lifting iron ore’s relative price close to $180 a tonne — just a whisker away from the heady highs of 2011.

And with iron ore futures on the Dalian exchange surging again yesterday, up 1.8 per cent in evening trading to fresh records, analysts suggest the iron ore price could still have a way to run.

In a note to clients yesterday, Macquarie analysts said falling iron ore stockpiles at China’s major ports, plus a lift in margins at steel mills on the back of annual winter shutdowns of older facilities, provides support for further rises in the iron ore price.

“Port stocks continue to decline and we see this as a key driver of the current strength in iron ore prices. A move below 100 mill­ion tonnes of port stocks could present further upside risk in the near term to spot prices,” the note said.
Export figures from Pilbara ports show BHP and Fortescue Metals, in particular, were successful in getting additional tonnes to market as the price surged — with BHP likely to have set a new monthly record for June and Fortescue also at record levels — suggesting both are likely to come in at the top end of their revised export guidance for the financial year.

BHP has said it expects its Pilbara mines to ship 265 to 270 million tonnes in the 2018-19 finan­cial year, with Fortescue to ship 165 to 170 million tonnes.

But Rio Tinto, which recently cut its production guidance for the second time this year, struggled in June as problems at its Brockman mine weighed on exports. Rio downgraded its Pilbara output to between 320 and 330 million tonnes for 2019.

But even so, with all three producers operating at cash costs below $US15 a tonne, their margins for the half-year to the end of June look likely to be eye-wateringly large.

The surge, which has extended to lower-grade iron ore cargoes, also makes Gina Rinehart’s $427 million buyout of Atlas Iron last year look exquisitely timed.

When the bidding war between Mineral Resources, Fortescue and Mrs Rinehart’s Hancock Prospectingbegan, Atlas was barely making a margin on its lower grade product, shipping ore to China at an average cost of $63 a tonne in the September quarter.

Iron ore grading 58 per cent is now selling for close to $160 a tonne landed in China, suggesting the margins on Atlas products are also hitting levels not seen for the best part of eight years.

The iron ore price highs come as Vale hits more legal problems in Brazil, with a special report of the Brazilian parliament recommending criminal charges against a dozen current and former executives of the mining giant, including former chief executive Fabio Schvartsman, over the dam collapse tragedy that up-ended iron ore markets early this year.

The report’s recommendations are not binding, but heap more pressure on the company and the federal prosecutors investigating the tragedy.

Vale said yesterday it “respectfully disagrees” with the findings, saying authorities should wait for the findings of a full technical report on the cause of the Brumadinho dam collapse before taking further steps.

And while the company won permission to ramp up production from its Brucutu mine in mid-June, Macquarie analysts said shipping data from Brazilian ports showed Vale’s exports were still to recover enough to shift the needle on iron ore prices.