Iron ore prices have drifted below $US100 per metric tonne for the first time in nearly two years, driven down by market worries that demand from China is being outpaced by increasing output of the steelmaking raw material from international miners.
Australian exporters of iron ore -- the cheapest in the world -- still have headroom for exports at current prices, but analysts say some may be need to rethink planned expansions if the price continues to slide.
The Steel Index's benchmark price for ore with 62 per cent iron content at China's Tianjin port was $98.50 a tonne, down 2.2 per cent on Friday's level, with the record high of above $190 a tonne reached in early 2011 a distant memory.
"It certainly creates a big headwind for the iron ore mining companies," said Jeff Largey, London-based head of metals and mining at Macquarie Research. "In the near term, they will remain under pressure."
Australian mining companies like BHP Billiton, Rio Tinto and Fortescue Metals Group have poured billions of dollars into new mining or existing operations over the past few years as the value of industrial commodities soared to record levels in response to robust demand from China. The country is the world's largest buyer of iron ore, accounting for more than 60 per cent of seaborne trade.
Rio Tinto already has committed to boosting annual iron ore output in Australia by more than 20 per cent over the next four years in a bet Chinese demand will stay strong. Fortescue Metals and BHP are also building their production. Last week, Rio Tinto said its iron ore mining operations in the Pilbara reached a production rate of 290 million metric tonnes a year, two months ahead of schedule.
Fortescue Metals recently hit its target of producing 155 million tonnes of iron ore on an annual basis, and thinks it could boost exports by a further 13 per cent by mining more efficiently.
Shares in BHP were down 1.7 per cent, Fortescue fell 4.6 per cent and Rio Tinto lost 2.8 per cent at the end of trading on Monday.
"If prices dipped below $80 per tonne, we would see some marginal supply cutbacks, but the bulk of Australian iron ore production is still profitable, down to $50 per tonne," said Mark Pervan, an Australia-based analyst with ANZ Research.
"That said, an iron ore price below $80 per tonne, would halt or delay most expansion plans creating possible export supply tightness in two [to] three years' time," he said, adding that he expected prices will bounce back by $10-$15 a tonne in the months ahead.
Citigroup has said a continuing recovery in China's steel production as well a slower rate of supply growth in the second half could hold iron ore around $108 in 2014, although in the long term it remains bearish, forecasting a price of $80 a tonne in 2016.
Instead of bigger and cheaper producers of iron ore in Australia, the heat more immediately is likely to be on Chinese ore producers, who may have to cut back on their own output at ore prices between $90-$100 per metric tonne, said Paul Bloxham, HSBC's chief economist in Australia and New Zealand.
If such cutbacks kicked in, it would support prices because of lower supplies, he said.
However, reductions by Chinese producers could easily be offset by higher supplies from India, which was the third-largest supplier after Australia and Brazil until two years ago, when legal rulings closed mines and slashed exports.
India's Supreme Court recently eased a mining ban in two of the biggest producing provinces -- Goa and Karnataka, although the outlook for increased exports have been clouded by a separate order issued Friday to shut 26 mines in Orissa state, another leading producer.
Industry officials see these measures as temporary hurdles as they expect India's new industry-friendly government will try to remove obstacles to iron ore production and exports, although it is an open question how quickly this will happen.
"We do see Indian iron ore exports picking up, but they may not reach the level as three years ago," said Mr Largey of Macquarie Research.
Source:- theaustralian.com.au
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