Is $30 per Ton for Iron Ore Still a ‘Fantasy Land’?



Iron ore miners are reeling

Sam Walsh, Rio Tinto’s (RIO) CEO (chief executive officer), believes that Rio is in a “privileged position” in this commodity price environment. It has first cost quartile assets, which can generate returns throughout the cycle.

Benchmark iron ore prices have fallen to $39 per ton, which is a record low according to the daily price compilation dating back to 2009. Walsh said that at that price, there are many miners that are “suffering pretty loudly.” He also said, “There are a lot of producers that we believed would leave the market that are hanging on by their fingernails.”

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Capacity expansions

Iron ore giants, particularly Rio Tinto (RIO), Vale SA (VALE), and BHP Billiton (BHP) (BBL), have been criticized for such low prices, given their capacity expansion strategy even in the face of weaker demand. Cliffs Natural Resources’ (CLF) CEO Lourenco Goncalves has time and again blamed these Australian miners for the iron ore glut in the market. He blames them for misreading Chinese iron ore demand appetite and the resulting weakness in iron ore prices.

But Walsh thinks it isn’t normal for low-cost producers such as Rio to think about holding back supply. He said that ~400 million tons of high-cost capacity has come online in the market in the last five years. He implied that the exit of these high-cost producers would lead to a supply-demand balance in the iron ore market.

Cliffs form 3.5% of the SPDR S&P Metals and Mining ETF (XME).

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$30 per ton iron ore: Is it sustainable?

Walsh also believes that the market’s fear of the price of iron ore going down to $30 per ton doesn’t hold much water. He explained that at $30 per ton, cost and freight (or CFR) and the free on board (or FOB) costs from Australia would be ~$25 per ton. It would be $15 per ton from Brazil. This is far from sustainable for many producers. So Walsh believes a $30 per ton iron ore price is still a “fantasy land.”

In the short term, prices could go lower, as producers don’t expect to cover their fixed costs in the short term. A parallel can be drawn with coal producers (KOL), which kept on running on losses for an extended period of time before shutting down operations. So iron ore prices might also need to stay lower for longer for the supply adjustment to take place.

For more about iron ore miners on the position on the industry cost curve, you can read Market Realist’s How Low Can Iron Ore Prices Go from Here?


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