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Why Asia Pacific is also under pressure

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Updated

Asia Pacific iron ore operations

Asia Pacific operates one wholly-owned iron ore complex. It’s located in western Australia in Koolyanobbing. It produces iron ore lump and fines. It serves the Asian iron ore markets with direct shipped fines and lump ore.

It mainly sells under three-year supply agreements with Chinese steel producers and two-year supply agreements with Japanese customers. Pricing for other customers includes a shorter-term pricing mechanism of various lengths. It can be up to one month. It’s based on the daily spot prices’ average.

Iron ore’s demand dynamics are getting worse for China and Japan. This will put pressure on the realized prices for Asia Pacific’s iron ore shipments.

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Competitors

In this segment, Cliffs Natural Resources (CLF) competes directly with big iron ore players—including BHP Billiton (BHP), Rio Tinto (RIO), and Vale SA (VALE).

Compared to these players, it’s cost profile is important. CLF’s cost profile is severely disadvantaged right now.

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Asia Pacific had a cash cost of $53.4 per ton for 2Q14—compared to $40–$45 per ton for its peers. Also, the Asia Pacific division has lower grades compared to most of its peers. Its grades vary from 55%–60%. The grades are 62% and above for its big peers. This attracts a considerable discount in the oversupply situation. It results in lower revenues per ton.

Short mine life is left

According to the Wall Street Journal, Glencore (or GLNCY) and several Chinese steelmakers have expressed interest in Cliffs’ Australian iron ore assets.

It would have been easier to find a buyer for its Australian operations. It’s closer to China. The Australian assets also have lower costs. The mine life only has six years left. The mine also has small reserves of 11 million tons. It can’t increase the life of the mine because of limited resources. As a result, it wouldn’t be wise for a buyer to purchase the mine at depressed iron ore prices.

Investors can invest in the SPDR S&P Metals & Mining ETF (XME). It gives investors exposure to the metals and mining sector.

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