Iron ore prices continue to rise, above $130 but still below the highs earlier in the year. I have been reading most reports that they "cannot go much higher" some forecasts that predict they will be remain stable between $120 and $130 but also read a few that forecast down 45%. We are in a good case scenario at present, worse case scenario down to $80 what are the implications for the stock?
Sentiment: Strong Buy
I've seen those forecasts down to $80 also. So I guess the theory is Rio, Vale and others are borrowing Billions of dollars so that they can drive the price of their commodity down, thus driving down their margins. The question we have to ask is why would they do that? Or do the I/O producers know that the demand will be there to absorb the extra capacity?
Ok, so I agree with you, but unfortunately we are on the wrong side of the equation. The big miners are still profitable even when IO drops to 80/t. In fact, due to their large scale of production, their cost per ton is only at around 50/t. VALE is the absolute cheapest with costs at around 35/t. As a result, these miners have actually decided to invest MORE capital and expand output even during these tumultuous times. Now there is one thing that has to be stated, it takes anywhere from 3 to 4 years to get a mine up and running. That means that most of the expansion projects which are coming online were started in 2010 and 2011 when times were relatively good. Most of these projects cost several billion dollars which means that even though IO prices are declining, most of these companies have a choice of halting production and losing several billion in sunk costs, or continuing and still making profits albeit smaller margins per ton. The logical choice is unfortuantely to go ahead with production to the point when margins are no longer positive. Let's take a look specifically at some of these projects. As you mentioned China produces about 450million tons and global demand is a littlte under 900 million right now The biggest problems in the next 12 months are Rio Tinto, Fortescue, and the Roy Hill project.
1) Rio Tinto: Pilbara 360 project. In 2011, Rio Tinto invested 5 billion in an expansion to increase their output of Iron Ore in Western Australia (Pilbara) from 220 million tons of IO to 360 IO iron ore, an increase of almost 140 MILLION tons. This project will begin to mature at the end of Q3 2013 (in 2 months) and RIO should peak at the beginning of 2015.
Score Card: RIO + 140million tons
(This is why the main reason why UBS and other companies see Iron Ore begining to drop in Q3)
2) Fortescue: 8Billion dollar expansion on railways in Western Australia. Fortescue had total production of 55 million tons in 2012 (relatively small) however they planned a
What's the deal with all the predictions that IO prices are suddenly going off a cliff...??? Oil is now over $109 a barrel despite MONSTROUS over-production from fracking, etc., and yet suddenly the Aussie IO companies are going to over-produce & IO prices will suddenly CRASH...?!??
I realize that the oil price has a lot to do with non-prod factors such as fear about Egypt, etc., but it is mainly up cause of A GROWING WORLD ECONOMY...
Is IO any different...??? China's 2nd half will be better, as will Latin America, Europe is bottoming by 1Q or 2Q 2014, & US autos, housing, jobs all improving....
But IO - unlike oil & other basic materials/commodities will TANK...?!??
Sentiment: Strong Buy
China produces around 450 million tons of iron ore per year, and it has thousands of iron ore mines. The majority of them are low-grade and high-cost mines. When the iron ore goes under $100, at least half of these mines will have to close.