LAUNCESTON, Australia, Sept 24 (Reuters) – The recent debate over iron ore has tended to be whether the three mining giants who dominate seaborne supply will win their massive bet that they can drive high-cost producers out of the market.
But a more relevant question is whether they will have the time to achieve their aims. The Anglo-Australian pair of Rio Tinto and BHP Billiton, as well as Brazil’s Vale have flooded the market with their low-cost iron ore, with supply from Western Australia ramping up dramatically in the past year.
This has led to a collapse in the Asian spot price .IO62-CNI=SI to a five-year low of $79.40 a tonne on Tuesday, down 41 percent from the end of last year and 58 percent from the record $191.90 a tonne reached in February 2011.
The main question for the big three is not whether they can drive higher-cost competitors to the wall, but how long their own investors will tolerate the lower earnings as a result of the weak iron ore price.
While the chief executives of the big three haven’t exactly said so in public, they are clearly hoping for a relatively short war and a quick victory, after which iron ore prices will once again rise and stabilise at a higher level. Again, that price level hasn’t been clearly spelt out, but I would imagine the big three have a number in mind somewhere above $90 a tonne, with $110 likely viewed as a ceiling.
The Australian government’s commodity forecaster, the Bureau of Resource and Energy Economics, lowered its 2015 iron ore price forecast to $92.40 a tonne from $94.60 previously, while also lifting its forecast for Australian exports to 735.3 million tonnes in the 2014-15 fiscal year from 720.7 million.
This forecast is broadly in line with several other respected analysts, with the consensus revolving around a return to levels above $90 a tonne by the end of this year or early in 2015 as high-priced supply leaves the market.
If this is the case, Rio Tinto’s Sam Walsh and BHP’s Andrew Mackenzie probably have not too much to worry about.
A scenario in which iron ore prices recover and stabilise around $90 a tonne will allow them to make significant profits, and would justify the billions of dollars they have spent to ramp up supply from their mines in Western Australia.
BEST LAID PLANS MAY GO AMISS
However, what happens in an alternative scenario, where high-cost supply, particularly Chinese domestic output, doesn’t leave the market as fast as expected.
And to make matters worse, what happens when more low-cost output from mines not operated by the big three also comes on line.
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