Even as Fortescue Metals Group races to hammer down production costs, the leaner miner faces the prospect of becoming the marginal producer of the large iron ore players, once Brazil’s Vale brings its new mega expansion project online, analysts say.
Iron ore crashed spectacularly overnight on Thursday – falling 6 per cent to $US55.63 a tonne – its biggest one-day decline in a year. It snatched back much of the modest recovery made since hitting a record low of $US47 a tonne in early April.
UBS mining analyst Glyn Lawcock told AFR Weekend that “the concern the market has is that the all-in cash delivered price that FMG needs to be cash-neutral is ultimately going to be the dictator of where the long-term price settles”.
Fortescue could become the highest-cost of the large producers – Vale, Rio Tinto and BHP Billiton, and newcomers Roy Hill and Anglo American, he said.
“As more low-cost supply comes on, and high-cost supply is pushed out, ultimately the risk is that Fortescue becomes the most significant size marginal player.
“So even with their newly discovered cost base, they could still find themselves not making cash.”
COSTS INFLATED BY HEDGED FREIGHT
Vale sealed a major $US16.5 billion ($21.6 billion) expansion last month with financial backing from China that will allow the miner to produce 90 million tonnes of high-quality iron shipped to China at a cost close to that achieved by industry leader Rio Tinto. The project – called S11D, with cash costs of $US11 a tonne – should be finished next year.
“We would expect S11D to drop Vale below FMG on an all-in cash break-even basis to China,” Mr Lawcock said. Vale’s costs are inflated by hedged freight, but that will also change.
Fortescue chief financial officer Stephen Pearce told AFR Weekend last month that the miner has a cost structure superior to Vale’s, and believes some investors have failed to recognise this.”We believe we are well-positioned in terms of the four global iron ore majors and we expect [on a break-even basis] to even come a little bit below where Vale sit.”
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