Iron Ore Price Caves But Miners Remain Hugely Profitable, For Now
Chinese Government pressure on steel mills and commodity traders started to pay off earlier today when the iron price fell below $200 a ton for the first time in three weeks.
But the fall to $197/t is unlikely to put more than a dent in the profits of the biggest iron ore miners which are producing the steel-making material at a cash cost of less than $20/t.
Even after allowing for all costs companies such as BHP Group, Rio Tinto, Vale and Fortescue Metals, are still generating profits of more than $150/t which is why investment banks expect record profits from the miners in the current financial year.
Macquarie Bank last week forecast a 74% increase in BHP’s profit for the year to June 30 with earnings tipped to rise from $7.8 billion to $13.6 billion with the lion’s share of the profit coming from iron ore.
The annual dividend is expected to more than double to $2.55 a share.
Price Slips As New Mine Opens
The bank forecasts coincided with the opening of BHP’s new iron ore flagship, the giant South Flank mine which is expected to start at a production rate of 40 million tons a year, rising over the next three years to 80m/t.
Significantly, South Flank which cost $3.6 billion to develop, will not increase Australian iron ore exports as it is replacing old mines scheduled for closure.
BHP’s timing with its big new mine has been impeccable with the go-ahead given three years ago when iron ore was fetching less than $70/t. First production occurred in week when the price was sitting around $220/t.
According to estimates made last Thursday, the day production started, BHP was looking at a payback on the capital cost of the mine in less than 12-months, an exceptionally fast return.
Even with the price falling iron ore will dominate the company’s profits for the next few years thanks to low production costs.
On the Australian stock market earlier today, BHP shares held up well thanks to the company’s exposure to a range of commodities with its price slipping by 1.9%.
It was a different story for Fortescue Metals Group, a pure-play iron ore, which dropped by 4%.
The fall in iron ore to less than $200/t was one of a series of commodity price corrections which also saw copper, tin, nickel and aluminum lose ground.
Signs that the commodities boom of the past 12-months might have run its course include an easing of credit creation in China, measured in what’s called the credit pulse, which is a measure of credit as a percentage of the economy.
Macquarie’s iron ore price forecast is for today’s fall to be the start of a sustained decline with the price slipping to $140/t later this year and then down to $105/t next year, before bottoming around $74/t in 2024.