Author: yinghui

While the mining boom was tied to the skyrocketing gold price and the massive demand in coal, what really created it was iron ore: the explosion in the metal’s price is what really drove the mining boom to its spectacular highs, lifting Australia out of the Global Financial Crisis that hit much of the rest of the world.

By 2011 the Australian market was capitalising on prices of US$187 per tonne, a rate that was 13 times higher than the price then the price only eight years beforehand, in 2003.

Prior to the start of the mining boom this metal was unloved, albeit stable, price-wise.

However in 2004 the metal started an upward trend that continued slowly until 2008, just before the GFC hit, appearing to flatline at US$60 per tonne for the better part of a year. Then the financial turmoil hit and the price begin to spike rapidly, moving upwards unabated until it peaked at close to US$200 per tonne.

In the wake of this commodity rush it dragged the major miners Rio Tinto and BHP upwards, and in turn created a more suit-able market for players such as Fortescue Metals to peg high debt against high returns and make their relatively new company viable.

It also created market conditions for the rise of billionaires such as Gina Rinehart with her Roy Hill project and Clive Palmer with his continually embattled Sino Iron project.

The good times were expected to last forever; at least that is what the Australian Government thought in its attempt to impose both the Resources Super Profits Tax and its successor the Mineral Resources Rent Tax solely on iron ore and coal.

But as 2011 came to an end iron ore began its fall, one that is continuing and seeing the metal plumb the depths of the market.

In the space of only two months it dropped from more than US$177 per tonne down to US$135 per tonne, recovered, and then began to fall once more.

It managed to stay above the US$100 per tonne mark for most of this decline, apart from a very brief dip below this level in September 2012.

Although this decline appears to be unstoppable, the fall must eventually come to a basement: but when?

According to the market, it won’t in 2015.

Last month the price of iron ore fell to approximately US$70 per tonne.

The commodity has been on a consistent downward trend this year, after it plummeted to double digit territory in May from its historic triple digit highs, the first time it has fallen that low in two years.

According to ANZ’s head of Australian economics – corporate and commercial, Justin Fabo, iron ore has been one of the weakest commodities this year, and likely to continue in this vein.

“Key consumers – Chinese steel mills – still don’t seem convinced higher prices are warranted, while high iron ore port stocks and rising seaborne supply remains on offer.

It reached a new nadir last month after trading at just US$75 per tonne, marking a 42 per cent loss since the start of the year, although it quickly recovered.

However this new low is not expected to be the bottom of the trough with data from Morningstar predicting an eventual slide below US$70 per tonne.

New research from the analyst firm has forecast the metal to reach its lowest point in 2017, falling to US$70 per tonne before recovering to a more stable US$75 per tonne by 2020, due to Chinese iron ore miners slowing output and the righting of prices as more stock floods the market.

This has been echoed in recent IBISWorld research, which states: “The industry is expected to grow at a slower rate over the next five years through to 2019-20”, adding that “iron ore prices (in US dollars) are expected to decline slightly over the five years through 2019-20 [with] this decline expected to stem partly from higher production and output from Australian mines over the next five years.”

The paper also pointed to an increase in output from Brazil and West Africa flooding the market as contributors to the price slump.

Speaking to Grant Thornton partner – audit & assurance, Brock Mackenzie, he told Australian Mining that current conditions had created a perfect storm for the metal early next year, as there are high levels of supply expected to come online from larger producers combined with a slowing growth in China.

This slide for the iron ore sector has not been a surprise for the industry or the market, with the Bureau of Resources and Energy Economics stating in its September report that prices will continue to be strained.

“A rapid increase in iron ore supply combined with moderating growth in China’s steel production have pushed iron ore prices lower in 2014. Prices have fallen nearly 40 per cent down from around US$130 a tonne (CFR China) in January to US$82 a tonne in September,” BREE said.

This later fell to below US$70 per tonne in November.

While the group said iron ore price volatility is not uncommon, the difference this time is the oversupply flooding the market.

This is likely to be worsened due to the fact China has now opened its ports to Valemax size carriers, built by Brazilian iron ore giant Vale.

Valemax are Very Large Ore Carriers (VLOC) owned by Brazilian mining giant Vale, and are designed to carry iron ore from Brazil to around the world.

They have capacities ranging from 380 000 to 400 000 short tons deadweight, and are the largest bulk carriers ever built, with draughts of between 22 and 32 metres, and are designed to meet Brazil’s need to freight more in a single journey due to its distance from many of the main iron ore customers.

China initially banned the carriers over concerns regarding the potential impact on supply and prices the large cargoes could have, using the ships own deep draught and size as impetus to revoke vessels of this size from docking at mainland Chinese ports in 2012.

Ship owners previously lobbied against Vale’s super vessels, fearing they would give the company a monopoly over the iron ore and shipping industries.

China Cosco has signed a 25 year deal with Vale that involves 14 of the massive Valemax ships.

“The current regulation actually already legitimises these vessels to berth at Chinese ports. If you look at how the ban was initiated in the first place, it will be unlikely for the government to make an official announcement with much fanfare that says the ban is loosened,” an unnamed executive from state-owned port company explained.

“Eventually, the ban will be lifted in a quiet manner. You may see a Valemax ship granted approval by a local maritime authority to dock, and that will be it. Officials realised the ban has hurt China’s economic interests, pushing up the costs for iron ore imports,” the executive said.

According to Anglo American, this global glut of iron ore, will keep prices at these five year lows for a minimum 12 months.

However Australian iron ore, due to its high quality, will likely still be in demand.

In Australia alone over 200 million tonnes of new ore has begun export at the same time as China stopped stocking up on the commodity.

Unfortunately for Australian suppliers this is set to increase as BHP and Rio Tinto expand their West Australian iron ore operations, Fortescue cranks up the production rate from its newly opened Solomon Hub, and Roy Hill begins full production.

Mackenzie explained there are “a lot of issues likely to be ahead on the supply side, with it more than likely that larger producers will also use the situation to gain more market share and edge out the smaller producers, so we are likely to see these larger producers use this aggressive pricing environment as an opportunity to push more marginal operations out, so that smaller producers fall by the wayside”.

ANZ’s Fabo clarified the forecast, saying “swelling Australian iron ore exports have weighed on prices but the increase in supply will be slower in the second half”.

Vale expanded on these statements, with the miner’s global director of ferrous marketing and sales, Claudio Alves, telling Bloomberg “I don’t think the market will be oversupplied forever”.

However he went on to echo Mackenzie’s statements on which miners will come through this current trough, stating: “Only the big suppliers with world-class assets, scale of production, efficiency, and good costs will be able to survive.”

BNP Paribas’ managing director energy and natural resources investment banking Asia-Pacific, David McCombe explained that this will soon reach a tipping point depending on when the Chinese Government chooses to stop subsiding its iron ore industry.

“There will be fewer players in the market and more opportunities to export to China when the government makes a decision regarding its ongoing support for its own iron ore industry.

“It is supporting it in the same way that it is propping up its own coal industry, and right now many of their mines’ costs are around US$120 per tonne, so they are very marginal at the best of times, so the price will return slightly when these smaller players drop out.”

Credit market conditions in China also affected end-user demand for steel, BREE stated, causing a sluggish growth rate.

Fabo added “the negative market reaction has been over­done, and we think prices are now vulnerable to relief rally if Chinese news starts to improve”.

According to IBISWorld there are expectations of improvement, with “further growth forecast over the next five years”.

However Citigroup painted a much darker picture of the 2015 iron ores market.

According to Citigroup analyst reports, the material is likely to average around US$72 per tonne in the first three months of next year.

It went on to paint a darker picture for iron ore, slashing the second quarter forecast from US$80 down to US$65 per tonne; it also downgraded the third quarter from US$78 to US$60.

However it did see a small uplift in the last quarter of 2015, only downgrading the forecast from US$78 to US$62.

Goldman Sachs was slightly more optimistic, holding the view that it will hover around an average price of US$80 per tonne.

BNP Paribas’ managing director energy and natural resources investment banking Asia-Pacific, David McCombe, told Australian Mining the group expects the iron ore price to rebound in 2015, with similar expectations to Goldman Sachs.

“We expect it to rebound to around the low US$80 per tonne mark,” he said.

“It is really all about the performance of the steel sector, which we believe will pick up in the last quarter of 2015.

“While it won’t be a significant rise, longer term we will see the steel sector pick up about two per cent, and increase around two to three per cent the year after that,” McCombe said.

“It will most likely end up sitting, at the end of the year, at between US$85 and US$87 per tonne.

“So we do expect it pick up slightly over the year, but really it will be more about the ability of these iron ore producers to absorb the current losses, and about these miners having positive cash flows moving ahead.”

While BREE also expects iron ore prices to rebound from current lows, it said highs of $US 130 are unlikely to be repeated any time soon.

In regards to investors in the market, Mackenzie said the approach will be similar to that of gold, urging investors to form a view as to the company’s cost of production as a benchmark for whether it will be able to survive further prices.

“The focus for investors should be to familiarise themselves with the production cycle as well,” he added.

This cycle will be demonstrably slower, with less change, in the coming years.

Whilst revenues grew at a rate of 25.2 per cent for the 2013/14 period, it basically came to a standstill this year, with a growth rate of only 1.9 per cent, slowing again next year to 0.7 per cent.

However revenues are predicted to pick up to a more respectable growth rate of 2.1 per cent in 2016/17, moving upwards at a similar rate of 2.9 per cent the following 2017/18 financial year.

– Writen by Cole Latimer

Glencore and Peabody Energy have agreed to jointly manage the nearby Wambo and United coal mines in the Hunter Valley, the first joint venture of its kind in the region.

The 50-50 joint venture will combine Wambo’s open cut mining operations with United’s adjacent reserves and is expected to kick off in 2017.

Glencore will manage the combined mining operations and Peabody will continue to operate coal washing and loading facilities.

In a statement released today, Peabody said the JV will deliver significant synergies by improving productivity, cutting costs and extending the life of both mines.

“Peabody continues to take positive steps to further reduce costs, improve our competitive position and create value,” said Peabody Energy president and chief operating officer Glenn Kellow.

Kellow said the combined operation will provide ongoing local employment opportunities and economic contribution.

With coal prices expected to remain lacklustre moving into 2015, some industry analyst predict it will become more common for miners to pool their resources in this way.

In Queensland, Peabody’s Millenium mine entered into an agreement to share infrastructure with to BHP Mitsui Coal’s Poitrel project through the Red Mountain joint venture.

Terex’s revenues for the third quarter of the year were up +3% to US$ 1.81 billion, compared to the same period last year. However, its net profit from continuing operations was down -31% to US$ 58.7 million.

Terex chairman & CEO Ron DeFeo said, “Our results for the third quarter were in line with the revised guidance communicated in mid-September. Our Cranes segment met our lowered expectations for the quarter as end markets remain challenged. However, despite continued market environment challenges, we are anticipating sequential improvement from Cranes in the fourth quarter.

“While our AWP business is performing well, we had planned for a stronger second half of 2014 than has materialised which has put pressure on margins. AWP profitability was further negatively affected by currency movements late in the quarter, primarily the Brazilian Real, higher commodity costs and continued manufacturing start-up costs related to the production of telehandlers at our Oklahoma City facility.”

In terms of revenue growth, Terex AWP, which makes products under the Genie brand, was the company’s best performing division in the third quarter. Sales were up +12% to US$ 599 million, although operating revenues fell -15% to US$ 68.4 million. However, with an operating margin of 11.4%, it remains Terex’s most profitable business.

The only division to see a fall in sales was Terex Cranes, where revenues were down -7% to US$ 420 million. Operating income came in at US$ 21.8 million, a -25% fall compared to a year ago.

Of the other divisions, Terex Construction saw revenues rise +10% to US$ 207 million, the Materials Processing equipment business was up +5% to US$ 156 million, and revenues for Materials Handling & Port Solutions rose +2% to US$ 468 million.

Terex added that its overall backlog of orders was +22.5% higher than a year ago at US$ 2.2 billion. Having said that, the company was cautious about its outlook.

“Predicting market improvements has been challenging and in the near term we will be assuming flat markets and only performance improvements that we can control,” Mr DeFeo added. “Consequently, we now expect our annual outlook for earnings per share to be at or near the bottom of our previously announced range of $2.35 to $2.50, excluding restructuring and other unusual items, on net sales of between $7.3 billion and $7.5 billion.”

– Written by Chris Sleigh

Mining investment will collapse by 40 per cent over the next four years, but the sector will grow in absolute terms as a result of greater production and maintenance requirements, according to a new report.

Industry analyst BIS Shrapnel said the mining sector will also claim a greater share of the national economy in their Mining in Australia 2014 to 2029 report.

However, “economic headwinds” will present a series of challenges to the industry as it shifts out of the investment and construction phase, including a high Australian dollar, weak growth in export demand, and relatively high costs.

Federal and state governments will also face increased pressure in the face of the challenges of a weak economy, with expectations to facilitate growth through infrastructure spending.

The report said mining investment peaked at $93.1 billion in 2013/14, but this will drop by 40 per cent while production surges ahead by 33 per cent over the same four year period, along with the corresponding maintenance and export growth.

Already mining production has grown 9.4 per cent to $164 billion, with the significant investments of the boom and rapid expansion, including major LNG projects, pushing future production growth and lifting the industry’s share of the GDP by 12 per cent.

BIS Shrapnel’s Infrastructure and Mining Unit senior manager Adrian Hart said investment was only held up by the gas industry, while spending fell sharply across coal, iron ore and other commodities.

“Indeed, without oil and gas, mining investment would have fallen 25 per cent in the last financial year,” he said.

“However, the completion of a range of large gas projects on the east and west coasts will be the key driver of the long slump in investment from here.”

Exploration investment has fallen by 13.8 per cent to $6.6 billion in 2013/14, with gas contributing $4.6 billion to the total, however exploration levels are still quite high compared to historical conditions.

The key drivers for the mining industry will be production, operations and maintenance over the next five years, according to the report.

“Over the past three years, the real value of mining production has increased by 30 per cent. It now makes up 10 per cent of the national economy on this measure,” Hart said.

“Another 33 per cent growth is expected over the next five years, with the share rising to 12 per cent. In Western Australia, the value of mining production will overtake that of the entire Australian manufacturing sector during 2014/15. This is the new face of the mining boom in Australia.”

The key challenges to miners and contractors will be employment losses (forecast to drop by 20 per cent in WA over the next six years), closing operations, and the suffering prices of coal and iron ore, highlighted by report author Rubhen Jeya.

“The price of coal and iron ore – the two flagship bulk commodities which had held Australia’s exports high over the last few years – have suffered significantly over the past years, recording multi-year lows,” Jeya said.

“Miners should expect these less than ideal conditions to continue over the next few years.

“The relatively high Australian dollar does not make the situation any better.”

Jeya said that by withdrawing supply from the market through mine closures and reduced production, as well as the corresponding staff redundancies, this “natural attrition” will enhance the possibility for a turnaround on coal prices.

“Nonetheless, hard choices on operational viability need to be made. It won’t be an easy environment to navigate,” he said.

Contract mining is seeing increased pressure as a result of services being brought in-house by miners, but the report said this situation is unlikely to persist as production increases bring market recovery and increased demand for services.

Maintenance is expected to continue sustained growth, with a 7.5 per cent increase to $7 billion in 2013/14, and predictions for further increase to $9 billion by 2018/19, driven by ongoing improvements to operational efficiencies and the needs of expanded production plant and infrastructure.

Contract maintenance holds a 40 per cent share of the total, which is expected to remain steady over the next five years, rising from $2.8 billion to $3.7 billion by 2019.

Investors are ditching iron ore miners as the price of the commodity tumbles to a new five-year low of $US70 a tonne.

This is the third record low in as many days for iron ore which has now shed 50 per cent of its value since the start of the year.

The week’s free fall has spelt more bad news for iron ore miners.

Fortescue Metals Group shares have fallen by 55 per cent since February and closed $2.74 yesterday, a level not seen since the global financial crisis.

BC Iron and Mt Gibson also saw double digit percentage falls and are trading at 56 cents and 38 cents respectively.

BHP Billiton and Rio Tinto were cushioned from major sell-offs because of their lower operating costs and diversified portfolios, but fell by 2 per cent yesterday.

The fresh low comes as data out of China shows the average price of new houses slumped for the sixth month in a row.

Deltec chief investment officer Atul Lele said this means that housing supply is outstripping demand which is bad news for the country’s steel sector, AFR reported.

“We believe it represents the biggest risk to the Chinese and global economy,” Lele said.

Citigroup predicts iron ore will fetch $US72 a tonne for the first quarter of 2015 and crash to lows of $US60 a tonne in the third quarter before lifting again slightly by the end of the year.

The slump in prices has already seen two iron ore operations in Australia close with fears there are more to come as break-even costs are being tested.

Western Australia’s budget is also expected to have a multi-billion hole where iron ore royalty payments used to live as a result of the falling price.

This caused Premier Colin Barnett to hit out at BHP and Rio last month, accusing them of flooding the market with new supply which has forced prices down.

Barnett said he does not want to see iron ore mining in WA to revert to a duopoloy.

“By their own admission, the major companies are pushing increasing volumes on a month to month basis into the market, very conscious that is contributing to price falls in an already depressed market and very conscious by those quotes as an example of the impact this will have on smaller iron ore producers,” the premier said.

Speaking at a conference in Sydney, Rio Tinto boss Sam Walsh said Barnett shouldn’t complain about the company’s strategy to increase production seeing as the government signed off on the plan.

“I’m not sure where Colin is coming from in that given that we’ve been very clear in our plans and our expansions are approved by government,” Walsh said.