oh dear, here comes the warnings from the big boys RIO, BHP take on rivals amid expansion plans
The man in charge of Rio Tinto's massive iron ore business, Andrew Harding, has told smaller rivals to "take responsibility" for ploughing capital into projects that are not sustainable at current prices.
The price fall, caused by falling demand in China and the majors including Rio and BHP Billiton rapidly increasing supply, shows no signs of slowing, with the prices falling 1.5 per cent to hit $US58.58 overnight on Monday. The plunging price is putting extreme pressure on smaller producers with marginal operations such as Atlas Iron and BC Iron.
"The reality is, as the price comes down, if you made an investment with your own funds or shareholders' funds in a project that is not sustainable, and if the market place dips, that is your responsibility," Mr Harding said. "That is not anyone else's responsibility."
Mr Harding and BHP Billiton's president of iron ore Jimmy Wilson launched fresh defences of their expansions strategies at the Global Iron Ore and Steel Forecast conference in Perth on Tuesday, amid predictions the plummeting iron ore price would fall further and find a floor of $US50 a tonne.
BHP and Rio have been accused of using a "scorched earth strategy" that is forcing smaller miners out of business. The Australian Workers' Union wants BHP chief executive Andrew Mackenzie and Rio Tinto chief Sam Walsh "hauled" before a senate inquiry to explain their expansion strategy. The rationale for increasing production amid falling prices has also been questioned by West Australian Premier Colin Barnett.
BHP kept a production target for 225 million tons this fiscal year from 204 million the previous year. Rio is targeting annual production of 330 million tonnes this year and 350 million tonnes by 2017. Criticism misplaced
Mr Harding said criticism of Rio's growth strategy was misplaced, with the miner only the third-largest Australian increaser of supply during 2014 and Fortescue Metals Group pumping out the most new tonnes. Curtailing these efforts to improve market conditions doesn't make sense, he said.
"If we choose not to supply it, someone else will," Mr Harding said. "The minute someone else supplies and I don't, our shareholders lose out, our employees lose out and if that supply filling that void in demand is international, then the Australian people lose out, because they don't get the revenue-based royalties. That's the logic behind it."
Mr Harding's strong defence of Rio's growth strategy was echoed by Mr Wilson, who said the benefit of BHP's expansions "will be measured in dollars and cents".
"Our performance in the first half of the first half of the 2015 financial year makes for a good example, where we delivered an underlying EBIT margin of 49 per cent and a return on assets of 34 per cent," Mr Wilson said.
Mr Wilson said BHP doesn't see the business increasing production beyond its expected 290 million tonnes a year through additional capital investment, but there is potential for incremental increases through productivity improvements.
Rio Tinto is targeting iron ore production capacity of 360 million tonnes, though it is thought to be unlikely to reach this milestone unless its new Silvergrass mine is developed. A decision on the project has been deferred until 2016.
Rio Tinto expects 85 million tonnes of supply to exit the market this year, on top of the 124 million tonnes eliminated in 2014. Majority of closures in China
While the majority of the expected closures will occur in China, some of this supply would close in traditional seaborne supply regions "as some miners put their more marginal operations on care and maintenance," Mr Harding said, but was unwilling to be drawn on how much of this would be from Western Australia. Fairfax Media reported last week that analysts are expecting high-cost Western Australian mines to close before July.
Mr Harding said while there is current cost pressure relief from the falling Australian dollar and lower freight charges, the strength of a company's balance sheet will determine its tipping point.
"It is likely that balance sheet strength rather than cost-curve position will ultimately determine the timing of further exits of supply," he said.
Mr Wilson said 50 million tonnes of supply is likely to shutter in China in 2015. He would not comment on whether closures were likely in Western Australia but said the less mid-tiers that shutter supply, the lower the price will drop.
Citigroup global head of iron and steel Mark Lyons told Tuesday's conference iron ore prices could go as low as $US50 a tonne. 'Encouraging' dependence
"Chances are we will stay close to where we are," he said. "There's a floor in iron ore prices around $US50 a tonne. Going forward, the dependence on Australian iron ore by Chinese mills is increasing, which is encouraging."
Citi has a forecast average price of $US58 a tonne for this year while the Bureau of Resources and Energy Economics estimates an average of $US63 a tonne.
Resources consultancy Wood Mackenzie is forecasting the price to average $US70 a tonne this year. ANZ downgraded its 2015 iron ore price forecast by 24 per cent to $US58 a tonne. The bank expects the key steel making commodity to average $US60 a tonne in 2016, down 30 per cent from its previous forecast.
Mr Wilson said BHP predicted that the price would fall and low-cost supply would replace high-cost supply in the market, taking its last growth project to the board in 2011.
Both miners have been forced to drag an axe across their workforces this year, as part of their cost cutting drives. Mr Harding said "hundreds" of jobs would disappear in Rio's iron ore division, and when asked to clarify timing, said the time frame would be "shorter rather than longer".
Mr Wilson said BHP has also made some redundancies but "the lion's share are now done".
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