David Hargreaves on Bulk Minerals, week 35 2014

The UK Daily Telegraph, which makes the readings of Genghis Khan sound positively left wing, clearly needed a mining story this week, so it picked on the hapless, iron ore. No pain spared, particularly as it affects the two biggest mining shares on the London board, Rio Tinto and BHPB, with Anglo America bringing up the rear. It tells us:

Every $10 dip in the price of a tonne of the essential steel ingredient reduces Rio’s revenues by $2.8bn and those of BHPB by $2.2bn. The iron ore price is down 36% so far this year. It averaged $135/t in 2013, $111/t in H1 2014 and has now dropped through $90. Those who claim to know say it could seek a floor of $80. Now at that, Rio could still be safe but we are not so sure about BHPB, Vale or Fortesque. How did the collapse happen? All China’s fault. That country is by far the biggest user and importer. Its demand has been growing at up to 10% per year for over a decade, but in 2011-13 the music stopped. Just about all the miners had expansions on hand whilst new ones were joining the party. Nobody was prepared to give way. Rather, they took the approach of last-man-standing. That is how it still is.

What they hope is that the Chinese will crack first. Why? That country produces almost 40% of all the world’s iron ore, almost 1000mt/yr, yet still needs to import over 600Mt, about 60% of all the seaborne trade, itself over 1000mt. Now China’s own sources are known to be smelly, low grade and high cost. Since the world is in a growing surplus they could cutback and increase their imports. They have flirted with the market in this direction and the big three hope it will continue. Their lives depend on it. None of this prevents the Daily Telegraph putting out a ‘hold’ signal on the majors.

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About David Hargreaves

David Hargreaves

David Hargreaves is a mining engineer with over forty years of senior experience in the industry. After qualifying in coal mining he worked in the iron ore mines of Quebec and Northwest Ontario before diversifying into other bulk minerals including bauxite. He was Head of Research for stockbrokers James Capel in London from 1974 to 1977 and voted Mining Analyst of the year on three successive occasions.

Since forming his own metals broking and research company in 1977, he has successfully promoted and been a director of several public companies. He currently writes “The Week in Mining”, an incisive review of world mining events, for stockbrokers WH Ireland. David’s research pays particular attention to steel via the iron ore and coal supply industries. He is a Chartered Mining Engineer, Fellow of the Geological Society and the Institute of Mining, Minerals and Materials, and a Member of the Royal Institution. His textbook, “The World Index of Resources and Population” accurately predicted the exponential rise in demand for steel industry products.