THE world’s biggest iron ore producer, Brazil’s Vale, has given the battered Australian iron ore industry some hope prices for the steelmaking raw material will rebound.
But the hope does not extend to the survival of the highest cost local producers, with Vale’s argument for a rebound in prices being built on the shared misery of high-cost producers in more than 60 countries.
Vale told an investor briefing in London on Friday that the plunge in iron ore from $US135 a tonne at the start of the year to $US71.77 a tonne on Friday had overshot to the downside.
Vale’s executive director of ferrous minerals, Peter Poppinga, tipped that the price will “bounce back in the very near future’’.
As the world’s biggest producer with 327 million tonnes of production in 2014 (Rio Tinto is the next biggest with about 300 million tonnes), Vale could be accused of talking its own book.
But Mr Poppinga’s call was based on expected seaborne demand of 1.52 billion tonnes of iron ore, which he argued “points to a hypothetical price of $US90 a tonne’’.
He said that if prices of around $US70 a tonne were to persist in to 2015, as much as 220 million tonnes of iron ore production would be non-competitive, meaning demand would have to suddenly shrink to 1.3 billion tonnes.
“It shouldn’t be my objective here to discuss if $US90 is correct or $US70 is correct, the market is always right. What I am saying is just that … we have huge quantities to 220m tonnes of non-competitive iron ore out there.’’
He said that the 220 million tonnes of high-cost iron ore production will not be sustained.
“I can tell you it is already happening. We have lots of Chinese, many private companies and mainly located at the coastline, which are, of course, competing against the seaborne (market) already exiting. We have some other juniors, some other seaborne (market) players exiting,’’ Mr Poppinga said.
Two small Australian mines have already closed and higher cost producers like Fortescue, Atlas, Mount Gibson and others are busily slashing costs where they can to ride out the storm.
They are not alone. Vale estimates that eight years ago, there were no more than 20 countries exporting iron ore to China.
The surge in prices to a peak of $US191 a tonne in February 2011 prompted a mighty supply response, with more than 60 counties becoming iron ore exporters. But the numbers are starting to dwindle. In addition, high-cost domestic production in China is starting to drop out.
The hope of Vale and other big producers — Rio, BHP Billiton and Anglo American — is that enough production drops out to absorb their increases production.