Home > Market change > Iron ore’s stability keeps miners strong

Iron ore’s stability keeps miners strong

May 30, 2011

“After the recent carnage in commodities markets, iron ore stands out for its price stability. The commodity used in steelmaking has been trading at around $180 a tonne for most of the month, just as the costs of raw materials ranging from crude oil to copper and cotton have gyrated wildly.

Prices peaked in the first quarter above $190 a tonne – a record high – and have been trading in a narrow band between $185 and $175 for most of the last few weeks. This relative stability suggests that physical demand for commodities, particularly from China, remains well supported. It also suggests that mining companies continue to struggle to bring projects in on time and on budget to meet the increase in consumption.”

Source: Financial Times – Commodities Note, May 19 2011

Observations:

  • The iron ore pricing mechanism was changed last year, moving to a spot-price linked price instead of the historic annual benchmark price. As a result the miners have gained more flexibility in setting contracts.
  • Iron ore price increased threefold over the last years, with Asian growth and supply constraints mentioned as the most important drivers.

Implications:

  • Both Rio Tinto and BHP Billiton are planning to increase capacity of iron ore mines in Western Australia significantly, but supply is expected to be short for at least an other couple of years. As Indian ore will more and more be used for domestic steel production the long term prospects of Australian exports are good.
  • The high ore price will trigger development of projects with relatively high cost base, breaking even at prices far above the $50/tonne level. Low cost operations will be operated at maximum capacity while focus at these new high cost operations will be on cost control.

©2011 | Wilfred Visser | thebusinessofmining.com

Advertisements