Strong iron ore production and record export volumes out of Port Hedland are fuelling a global glut in the steel making commodity. The iron ore price has seen record falls in the last two months due to the strength of supplies, and while smaller players are struggling with the changed conditions the major shippers are focussing on high volumes and streamlined operations to remain profitable.
Port Hedland is leading the charge with record shipments in May, moving 36.1 million tonnes of iron ore (29.9 million tonnes of which went to China).
This iron ore price has seen record falls but they’re coming off record highs so it has been put down to a resettling of the price rather than a contraction in demand.
Economic News
The celebrations over a strong GDP figure for the March quarter were short lived when, a day later, April’s trade figures showed that the trade balance was back in deficit of $122 million, after the previous month’s surplus of nearly a billion dollars.
Net exports were shown to have made up 1.4 per cent of the 1.1 per cent increase in GDP for the March Quarter.
Imports are growing strongly, especially for mobile phones, but the falling iron price saw the flip-side, the export figure, contracting in April.
Commentary
Finance News Network spoke with Portfolio Manager of Pengana Global Resources Fund, Tim Schroeders, to better understand where the iron ore price is likely to go and what price levels miners can bare and still remain profitable.
“The commitment and the positive cash flows from the big players like Rio Tinto and BHP, their commitment is not going to waver but a protracted period at around that level ($70) will cause some of the smaller players to adjust their production or stem cash flow losses.”
“It’s very dependent on where you are on the cost curve and your ability to sustain your business through any long period where your prices are that low.”
But surely the major miners factored the impact that such strong production would have?
“Absolutely, the growth in that market’s been phenomenal led by China, but trees don’t grow to the sky, you can’t expect growth to continue the way it has been infinitum, and at some stage it will slow and we’re seeing that at the moment.”
The latest GDP figures show a huge dependence on mineral exports, is such dependence dangerous?
“It’s unsustainable, it’s good that we have such a strong globally competitive mining sector, but in terms of a sustainable broad base for the longer term it is a concern and hopefully there are new emerging industries that Australia can lead the world in and mining doesn’t bear the brunt of carrying all of Australia on its back in terms of GDP performance.”
Iron ore woes
Fortescue Metals Group Limited
(ASX:FMG) dragged on the mining sector in May as the price of the steel making commodity tumbled below $US100 per tonne. The materials sector lost 3 per cent last month while pure play iron ore producer Fortescue plunged almost 10 per cent.
Major miners BHP Billiton Limited
(ASX:BHP) and Rio Tinto Limited
(ASX:RIO) also fell over the month. Australia’s biggest gold producer Newcrest Mining Limited
(ASX:NCM) sank more than 5 per cent with the price of spot gold shedding 3.3 per cent in May.
Woes continue at the world’s largest drilling company Boart Longyear Limited
(ASX:BLY). At the company’s AGM, Chief Executive Richard O’Brien warned that exploration and mining expenditures has potential to contract further this year. He also said excess global rig capacity could further depress pricing of its services.
Regis Resources Limited
(ASX:RRL) plunged about 40 per cent to end the month of May at $1.55 after disappointing investors with an exploration update.
Change at the helm
Rio Tinto Limited
(ASX:RIO) has appointed a new boss to its aluminium business to replace, Jacynthe Cote who is departing for personal reasons. The global miner says Alfredo Barrios will be the new chief executive of its aluminium arm and will join the company from 1st of June. Mr Barrios comes from BP where he held the position of executive director and executive vice president downstream at the TNK-BP joint venture.
Rare earths producer Lynas Corporation Limited
(ASX:LYC) will switch its CEO to Amanda Lacaze immediately following the resignation of Eric Noyrez. Shares in Lynas Corporation have plunged about 70 per cent over the past year and traded at $0.165 before the CEO switch was announced.
Diversification
Iluka Resources Limited
(ASX:ILU) has spruiked an upbeat outlook for minerals sands market. The producer expects total zircon, rutile and synthetic rutile sales this year to grow beyond last year’s figure of 580,000 tonnes. Speaking at the company’s AGM Managing Director David Robb told investors the industry is emerging from a cyclical downturn and sales volumes will be restored over the coming years.
M&A
Aurizon Holdings Limited
(ASX:AZJ) and Baosteel Resources Australia have received no objections from the Foreign Investment Review Board for their proposed takeover of Aquila Resources Limited
(ASX:AQA). The rail freight operator has teamed up with Baosteel in an offer to buy 100 per cent of Aquila’s shares at $3.40 each. The company’s stock surged about 40 per cent to finish May at $3.47 on the back of the bid from Chinese giant Baosteel and Australian coal haulage company Aurizon Holdings Limited
(ASX:AZJ)
Guidance downgrade
Woes at mining services provider Ausdrill Limited
(ASX:ASL) continue with the company again revising operational performance downwards. Net profit is now expected in the $25 - $30 million range, down from earlier forecasts of about $35 million. Ausdrill says while most of its business is performing in line with management expectations, its 50 per cent joint venture in African Underground Mining Services has been a significant drag on revenue.
Sedgman cut guidance on mining services slowdown Resource sector services company Sedgman Limited
(ASX:SDM) has become the latest company to cut its guidance amid a slowdown in the sector. The company now expects to post a net loss of between $5 million to $7 million in fiscal 2014, down from an earlier forecast of a profit between $3 million to $6 million.
Perth based gold producer and explorer Regis Resources Limited
(ASX:RRL) have retreated after releasing an operating update and production guidance. The company has addressed recent flooding at its Garden Well open pit and confirmed normal mining of ore and waste remains on schedule to start up at the end of June.
Expansion
Kimberley Diamonds Limited
(ASX:KDL) announced it is going ahead with the re-commissioning of its Lerala Diamond project in Botswana. The company plans to spend $15 million to restart the operation and the work is expected to commence in the first half of 2015.
Indochine Mining Limited
(ASX:IDC) has raised $2.7 million in a share placement. 70 million shares were placed at $0.042 cents each that went predominantly to existing shareholders. The funds will provide working capital to advance ongoing discussions with parties interested in investing in the Mt Kare Gold Project.
Rio Tinto Limited
(ASX:RIO) is pushing ahead with plans to revive the massive $US20 billion Simandou iron ore project in southeastern Guinea. The global miner has inked an agreement with the Government of Guinea and its partners, Chinese state-owned Chinalco and the World Bank's International Finance Corporation.
-- John Treadgold
