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Iron Ore Stocks Crumble as Price Drops to Six-year Low

Posted: March 8th, 2015 | Author: | Filed under: Business News | Tags: , , , | Comments Off on Iron Ore Stocks Crumble as Price Drops to Six-year Low

Iron Ore Stocks Crumble as Price Drops to Six-year Low
Iron ore stocks have taken a beating on the share market, with the price of the commodity falling below $US60 a tonne. The benchmark price of iron ore dipped to $US59.3 a tonne overnight, hitting a fresh six-year low.

Prices for the steel making commodity have more than halved over the past year, driven by massive expansions in the Pilbara and Brazil. It has glutted the market, a situation the World Bank is predicting could last for up to two years ::::

Business commentator Tim Treadgold said the fall was in part driven by the Chinese government announcing its growth target would fall 7 per cent this year, down from 7.5 per cent last year.

“Iron ore is in a very unhappy place at the moment and it’s not going to come out of it very quickly. So much of it is related to growth in China and that is slowing.” Mr Treadgold said. “The world at the moment is chocka-block with commodities and it’s going to take a long time to eat into that surplus.”

Resources analyst Peter Strachan said it could fall even further.

“I wouldn’t have thought this fall was going to signal the bottom,” Mr Strachan said. “We probably need to see about a hundred million tonnes of iron ore production come out of the market over the next six months to reduce the oversupply. And to do that brutally the iron ore price is going to have to fall to around $US54 a tonne, and that will see some of the higher cost producers raise the white flag and say we can’t keep on doing this.”

Junior Miners at Risk

Those most at risk of collapse are the junior miners, they’ve been caught up in a tussle for market control, with Rio Tinto and BHP Billiton accused of flooding the market to knock out smaller, higher cost players.

The big players have greatly reduced their costs by slashing spending, jobs and shipping more tonnes.

Mr Strachan said companies like BC Iron, Atlas Iron and Mt Gibson Iron were not able to keep up.

“It’s really putting pressure on the high costs producers now,” Mr Strachan said. “It could even get down to Fortescue — it’s amongst the big four producers globally with Vale, BHP and Rio Tinto, but they are the highest cost producers of the big four and there could be quite a bit of pressure there. Costs are coming down but it’s a race to the bottom; as fast as they reduce their costs the prices fall.”

Mr Treadgold said this would result in mine closures, with bigger miners not interested in buying smaller companies.

“I think you’re going to see more high cost iron ore mines close, they simply can’t take the heat in the market, it’s killing them,” Mr Treadgold said. “There is a debate starting now as to whether some of the smaller iron ore miners should close their mines today, take their money and reinvest in something that’s got a better future. The best thing you can do it close it, hope the market recovers or a cheaper way is found to operate it.”

Maintenance Companies Profiting from Downturn

While the downturn is also putting pressure on contracts and suppliers in the mining services industry with very little work on offer, those in maintenance are booming.

Mr Treadgold said when times are tough companies stop buying new equipment and instead invest in their existing fleet.

“It always happens at this stage of the cycle and it will continue on for sometime.

“Basically mining companies have stopped buying new equipment, they haven’t got the money, they’ve got stuff in their yards, so it becomes a better proposition to refurbish, replace worn parts.

“That means that people in that business are doing quite well.”

He said while the sales arms of suppliers like Westrac and Monadelphous were being hammered, their maintenance division is booming.

“What you’ll find, that if someone at Westrac would talk to you, their sales of Caterpillar equipment has fallen through the floor but their maintenance and repairs business is going through the roof.

Mr Strachan agreed. “There’s a bit more preventative maintenance going on, a bit of trying to nudge bits of equipment to work for six years rather instead of five,” he said.

“If you’re maintaining them on the road, then that’s a bread and butter business, whereas selling the bits of equipment can be fairly lumpy and is really only a boom time activity.”

Iron Ore Price Slump Weighs Down Share Market

Iron Ore Price Slump Weighs Down Share Market

The fall in the iron ore price to the lowest level since the global financial crisis weighed on mining stocks and led the Australian share market lower.

The All Ordinaries ended down five points at 5,869 with the ASX 200 five points lower at 5,899. The price of iron ore in China dropped below $US60 a tonne and delivered a blow to shares in local miners.

BHP Billiton lost 1.5 per cent to $32.64, Rio Tinto was down more than 1 per cent at $60.39 a share, and Fortescue Metals fell 6 per cent.

Concerns over a global oil supply glut also caused energy prices to slide. Oil Search fell 2.5 per cent, Woodside Petroleum was down 0.2 per cent, and Santos was also off a touch.

The major banks also weighed on the market. Westpac fell almost 0.5 per cent, while National Australia Bank and ANZ were down 0.3 of a per cent.

Insurance company QBE and investment bank Macquarie both had gains. Property companies Lend Lease and Westfield also did well.

Telstra lost four cents to $6.28, and Qantas fell two cents to $2.87.

At Fridays close, West Texas intermediate crude oil was $US50.71 a barrel, Tapis crude in Singapore was worth $US63.18 a barrel, and spot gold was trading at $US1,198 an ounce.

The Australian dollar fell below the 78 US cent mark as a result of the European Central Bank’s economic stimulus measures giving the greenback a boost. One Australian dollar was buying 77.95 US cents, 70.73 Euro cents, 51.15 British pence, 93.59 Japanese Yen, and $1.04 New Zealand.

@mcsixtyfive

The Kernel

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