$18bn cut for Pilbara iron ore miners – by Malavika Santhebennur (Australian Mining – May 31, 2013)

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Pilbara iron ore producers could be in for an $18 billion annual revenue cut. The revenue hit comes as prices for steelmaking raw material fell to a seven-and-a-half-month low of $US112.90 a tonne. That is 22 per cent less than the average for the March quarter of $US145 a tonne.

This came as a result of new rounds of destocking by steel mills in China as steel prices decline and the industry faces over-capacity, The Australian reported. Based on the slumped prices, if production reaches 550 million tonnes this year, revenue would fall $18 billion of what was expected in the March quarter.

The share market closed 0.88 per cent lower due to weakness in iron stocks. Rio Tinto was down 1.35 per cent, BHP Billiton was down 1.18 per cent and Fortescue fell by 3.35 per cent. But smaller mining companies felt much of the brunt with Atlas Iron down 6.1 per cent and Mount Gibson down 4 per cent.

The Organisation for Economic Co-operation and Development downgraded its prediction for Australia’s economic growth this year, and the International Monetary Fund did the same for China, even as construction steel prices fell considerably there.

Smaller Chinese mills are selling iron ore shipments back to the market, and traders were unloading shipments at a loss in fear prices would further decline.

Commodities analysts at the Commonwealth Bank said that even if Chinese mills refill stockpiles, the country’s iron ore supply capability rises, and global seaborne rises, reports ‘suggests that iron ore prices may be weaker in the second half of 2013’.

Rio will feel the brunt of the dip in iron ore prices from a high of $US152 in mid-February, and chief executive Sam Walsh will have to reconsider the $US5 billion expansion of mine capacity at its Pilbara operations, planned for the fourth quarter of 2013.

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