High iron ore prices could be here to stay

The recent surge in iron ore prices has been largely attributed to the significant shortfalls created in global markets as a result of the Vale mining disaster in Brazil earlier this year. The result of this tragedy was increased demand pressure on reduced supply, naturally inflating prices.

The recent surge in iron ore prices has been largely attributed to the significant shortfalls created in global markets as a result of the Vale mining disaster in Brazil earlier this year. The result of this tragedy was increased demand pressure on reduced supply, naturally inflating prices. Chinese ports have seen their stockpiles dwindle to their lowest levels in years as a result, as Chinese and Indian demand appreciably outstrips their capacity to produce iron ore internally.

Concerns have been raised however, that this price rise is not sustainable for the commodity, and to a certain extent the major players in the market have demonstrated a conservative attitude towards the price increases. Whereas in the peak iron ore years circa 2011, large global miners like Rio Tinto and BHP pushed to expand their operations, this time around they’ve looked to return value to investors and spend their windfalls streamlining their operations instead. However, this has meant that the pressure on demand has not eased, and given iron ore’s key role in the manufacturing of steel, it’s not a demand that is going to disappear anytime soon either.

In 2011, as the price of iron ore peaked at around US$190 per tonne, there were two major factors that contributed to iron ore’s subsequent price demise; firstly, the boom in prices drove a massive expansion race for the mining companies to enlarge their operations, opening mines that would otherwise be considerably less profitable if the commodity sat at a lower price point. Secondly, the Chinese economy began to slow, reducing its infrastructure spending boom, which as a result lessened demand for steel, and consequently iron ore.

While the GDP growth figures produced by the Chinese are notoriously ‘consistent’ in terms of matching the forecasts produced by the State Council of China apparently regardless of economic circumstances, independent experts nevertheless forecast that peak steel consumption in the country is still some five or six years off. The Chinese government has also acted in the last couple of years to shutter a number of unsustainable and illegal steel producers in the country, which has increased profitability in the sector.

However Chinese iron ore producers have not been able to meet this upswing in demand. A significant reason for this has been the structural makeup of Chinese iron ore mines; the average Chinese iron ore mine only contains 13% iron ore. By comparison, the average iron ore mine controlled by the major Australian rivals is 62% iron ore. This translates to Chinese miners needing to shift around five times as much earth in order to generate the same quantity of commodity as their Australian competitors, making them substantially less profitable and less efficient.

As a result, the breakeven price for Chinese miners is an extremely high US$80 per tonne, which is potentially unsustainable. Australian miners however, because of the high grade iron that their mines produce, which is also a considerably higher proportion of what is excavated, are estimated to only require iron ore to sit above US$30 per tonne in order to break even. These global conditions have primed Australian miners to continue to be profitable into the longer term, beyond the headline grabbing upswing in the wake of the Vale disaster. 


Carpentaria Resources trades under the ASX code: ‘CAP

*Reach Markets have been engaged by CAP to assist with private investor management.

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