Small miners under big pressure if iron ore price falls

10 April 2017

ABC Net reported that surging iron ore prices over the past six months and the lower Australian dollar have extended the stay of execution for many of Australia’s smaller iron ore miners. However, now some are trying to diversify to survive and dodge the next likely downturn in a highly cyclical market.

The past few years have been a wild ride for the junior miners. As prices hit a low below $US40 a tonne in late 2015, “boomtime babies” like Atlas Iron and BC Iron were forced to mothball production. Over the course of the next two-and-a-half years mines gradually came back into production as demand picked up in China. Thanks to China’s stimulus spending and policy changes – including coal mine and steel mill shutdowns – spot prices more than doubled in a little more than a year, hitting their recent peak of $US95 a tonne in February. However, the juniors’ rebirth could be short-lived, with predictions that iron ore prices could slump again later in the year if China curbs infrastructure spending and tightens monetary policy to rein in rising debt.

Ms Roselea Yao, China investment analyst from Gavekal Dragonomics in Beijing, said the recent retreat in prices back to around $US80 a tonne could be the start of a correction, in part because the market has been inflated by commodity speculators. She said that “That could be because the fundamentals are so poor, vulnerable to any bad news or policy changes.”

Ms Yao said record stockpiles in China, as well as an expected ramp up in production by Chinese domestic miners could also weigh on prices.

Analysts have a broad range of predications about price, but there is one thing they agree on; it is going down.

London-based investment bank HSBC, focussed on new production coming in from big miners like Vale, has a low-ball $US39 in 2017, and an average long term price of $US52 a tonne.

UBS is more optimistic, having upgraded its price forecast for 2017 to around $US71 a tonne, but still down more than 10 per cent from current levels.

Minelife senior resources analyst, Gavin Wendt, expects prices to fall by around one third to $US50 to $US60 a tonne and that will hurt the smaller players.

ANZ senior commodity analyst, Daniel Hynes, is not as pessimistic. His forecast is prices will fall to the mid $US70 range in 2017, because government infrastructure spending will boost demand for steel. He said that “The downside is relatively limited due to that strong demand.” But he expects prices to fall to around $US61 next year, as Chinese steel demand weakens. Looking off into the distance, if the 2020 futures contracts pegged at $US43 a tonne are any guide, the junior miners will either have to cut their costs by around one-third, or find something else to do.

Source : ABC NET