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10-07-2015, 07:38 AM
Iron ore miners brace for more volatility
THE AUSTRALIAN JULY 10, 2015 12:00AM
Iron ore miners brace for volatilityFortescue Metals was the biggest winner with a 6.6 per cent jump to $1.785. Source: Supplied
A head-spinning 24 hours in iron ore may only be the start, with investors warned to expect more volatility in the market for Australia’s biggest export.
An early morning panic in response to an unprecedented plunge in the iron ore price yesterday transformed into a surprise rally for Australian iron ore miners as Chinese markets rebounded.
Yesterday had been shaping up as a bloody day for Australia’s iron ore sector following an 11 per cent plunge in the spot iron ore price to just $US44.10 a tonne. Both the closing price and the scale of the fall were the worst seen since the introduction of spot prices in 2009.
But a rally in Chinese markets and a rise in iron ore futures helped Australia’s miners not only recover early losses but, in many cases, close the day higher.
Fortescue Metals Group, having hit a six-year low earlier this week, was the biggest winner with a 6.6 per cent jump to $1.785.
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Iron ore giants BHP Billiton and Rio Tinto gained 1.8 per cent and 1.7 per cent respectively, while junior producer BC Iron gained 1.8 per cent.
Wood Mackenzie iron ore analyst Andrew Hodge told The Australian that the moves this week were similar to the “snowball effect” in May that saw prices fall “further than we thought was sustainable”.
“Similarly there have been some indications of weak demand, which is normally expected at this time, and this could be what’s driving the underlying weakening sentiment to produce another snowball effect,” he said.
Iron ore prices have been falling in recent weeks on the back of data showing a jump in exports from Australia and a rise in iron ore stockpiles at Chinese ports.
The falling price increased pressure on the Australian iron ore sector, which has already gone to great lengths to cut costs and improve efficiencies.
Smaller producers such as BC Iron and Mount Gibson will be losing money at current prices while Atlas Iron has used hedging and other forward-sale mechanisms to try to insulate it from the fall.
Fortescue chief financial officer Stephen Pearce said the company was still “very well placed for the future”. “We have previously guided a cash cost of production of $US18 (a tonne) for FY16, putting us firmly in the same part of the cost curve as our largest competitors,” Mr Pearce said.
“We are making a profit on every tonne that we produce and our cost performance is sustainable.”
The volatility has come at a particularly sensitive time for smaller producer Atlas Iron, with Atlas managing director David Flanagan trying to raise up to $180 million from investors to strengthen its balance sheet and reduce its debt burden.
The company’s 5c a share offer closes for existing Atlas shareholders today, with institutional investors having until next Friday to make their applications.
EIM Capital fund manager John Robertson said the efforts by Australian miners to cut their production costs over the past year had only helped the iron ore price go even lower.
“Flanagan (of Atlas) has done an outstanding job getting his costs down to $50 a tonne, which not long ago you would have thought was more than enough to keep his head above water, but you look at the last couple of days and think, ‘Crikey, now he’s got to do it again’,” Mr Robertson said.
He said sentiment out of China would continue to weigh on what was a “very volatile environment” for iron ore.
While China’s government-driven growth of the past decade was behind the mining boom, the mixed success of the Chinese authorities in trying to arrest the slide of its stockmarkets this week showed their inability to control the direction of its economy.
That in turn could be bad news for commodity producers that are heavily reliant on Chinese growth and investment to drive consumption. “We’re starting to see a relative impotence on the behalf of Chinese authorities in that they no longer have the ability to command markets like they did,” Mr Robertson said.
“That filters through to how much power they have elsewhere and whether they can sustain economic growth and generate investment like they have in the past. The answer is probably not, so that leads to inferences about demand for raw materials and overall growth rates.”
THE AUSTRALIAN JULY 10, 2015 12:00AM
Iron ore miners brace for volatilityFortescue Metals was the biggest winner with a 6.6 per cent jump to $1.785. Source: Supplied
A head-spinning 24 hours in iron ore may only be the start, with investors warned to expect more volatility in the market for Australia’s biggest export.
An early morning panic in response to an unprecedented plunge in the iron ore price yesterday transformed into a surprise rally for Australian iron ore miners as Chinese markets rebounded.
Yesterday had been shaping up as a bloody day for Australia’s iron ore sector following an 11 per cent plunge in the spot iron ore price to just $US44.10 a tonne. Both the closing price and the scale of the fall were the worst seen since the introduction of spot prices in 2009.
But a rally in Chinese markets and a rise in iron ore futures helped Australia’s miners not only recover early losses but, in many cases, close the day higher.
Fortescue Metals Group, having hit a six-year low earlier this week, was the biggest winner with a 6.6 per cent jump to $1.785.
Start of sidebar. Skip to end of sidebar.
MOREHigh-cost iron ore miners sweat
End of sidebar. Return to start of sidebar.
Iron ore giants BHP Billiton and Rio Tinto gained 1.8 per cent and 1.7 per cent respectively, while junior producer BC Iron gained 1.8 per cent.
Wood Mackenzie iron ore analyst Andrew Hodge told The Australian that the moves this week were similar to the “snowball effect” in May that saw prices fall “further than we thought was sustainable”.
“Similarly there have been some indications of weak demand, which is normally expected at this time, and this could be what’s driving the underlying weakening sentiment to produce another snowball effect,” he said.
Iron ore prices have been falling in recent weeks on the back of data showing a jump in exports from Australia and a rise in iron ore stockpiles at Chinese ports.
The falling price increased pressure on the Australian iron ore sector, which has already gone to great lengths to cut costs and improve efficiencies.
Smaller producers such as BC Iron and Mount Gibson will be losing money at current prices while Atlas Iron has used hedging and other forward-sale mechanisms to try to insulate it from the fall.
Fortescue chief financial officer Stephen Pearce said the company was still “very well placed for the future”. “We have previously guided a cash cost of production of $US18 (a tonne) for FY16, putting us firmly in the same part of the cost curve as our largest competitors,” Mr Pearce said.
“We are making a profit on every tonne that we produce and our cost performance is sustainable.”
The volatility has come at a particularly sensitive time for smaller producer Atlas Iron, with Atlas managing director David Flanagan trying to raise up to $180 million from investors to strengthen its balance sheet and reduce its debt burden.
The company’s 5c a share offer closes for existing Atlas shareholders today, with institutional investors having until next Friday to make their applications.
EIM Capital fund manager John Robertson said the efforts by Australian miners to cut their production costs over the past year had only helped the iron ore price go even lower.
“Flanagan (of Atlas) has done an outstanding job getting his costs down to $50 a tonne, which not long ago you would have thought was more than enough to keep his head above water, but you look at the last couple of days and think, ‘Crikey, now he’s got to do it again’,” Mr Robertson said.
He said sentiment out of China would continue to weigh on what was a “very volatile environment” for iron ore.
While China’s government-driven growth of the past decade was behind the mining boom, the mixed success of the Chinese authorities in trying to arrest the slide of its stockmarkets this week showed their inability to control the direction of its economy.
That in turn could be bad news for commodity producers that are heavily reliant on Chinese growth and investment to drive consumption. “We’re starting to see a relative impotence on the behalf of Chinese authorities in that they no longer have the ability to command markets like they did,” Mr Robertson said.
“That filters through to how much power they have elsewhere and whether they can sustain economic growth and generate investment like they have in the past. The answer is probably not, so that leads to inferences about demand for raw materials and overall growth rates.”