This month we will be looking at the recent media surrounding the falling iron ore price and how the Australian mining giants, BHP and Rio Tinto continue to expand. Globally, the falling price is having a major impact on resource company profit margins, yet Australian production rates are rapidly increasing.
Currently the iron ore price is at a five year low, but this has not stopped BHP and Rio Tinto’s very enthusiastic expansion in what is considered to be a relatively oversupplied market.
As the world’s lowest cost iron ore producers, it is thought that their main reasons for increasing production may be:
• to ensure dominance over the medium term – it has been suggested that BHP and RIO (with Vale in Brazil) are intending to push all other players out of the market and
• to ensure medium term price rise and stability – once all the juniors and high cost producers are out of the market, the exit of this supply will see prices dramatically recover.
Published in recent months, Rio’s chief executive Sam Walsh has previously said he was not concerned by the sliding iron ore prices because Rio was Australia’s lowest-cost producer. “Regardless of what the price is, we will be the last one standing”, he said.
Similarly BHP’s iron ore president Jimmy Wilson stated in a recent media release, that he believes with BHP’s expansion plans, they can produce iron ore, before the cost of shipping and government royalties, for less than $US 20 per tonne. With today’s price at $68 per tonne, this would make for a very healthy profit margin.
From MACRO’s perspective, BHP and Rio have the ability to continue to lower their costs particularly when compared to the resources companies that do not have expansion options or the funds to do so. Therefore iron ore exports are going to continue to rise (not fall) from Port Hedland and mining operations will continue to expand at Newman.
All in all, it could be seen as a very clever strategy for BHP and Rio to increase volumes and ensure high (though not super) profits over the medium term. We believe the strategy does not mean job reductions for BHP and Rio as they remain very profitable, plus with expansion it is reasonable to assume even more man power will be required (therefore more accommodation as well).