BHP and Rio suffer as iron ore hits 10-year low


By: Andrew Critchlow

The Telegraph – Iron ore prices have hit a 10-year low, sending shock waves through the global mining industry and prompting concern among analysts that smaller producers could soon be forced out of business.

The price of a tonne of ore quoted on the Quingdao China index fell to $US47.08 yesterday, building on a week of declines amid an ongoing slowdown in consumption in the world's second-largest economy.

Benchmark and premium prices for the ore – used in steelmaking – are down more than 50pc year on year.

That has hit shares in the biggest London-listed mining companies such as BHP Billiton, Rio Tinto and Anglo American, which account for the vast majority of seaborne iron ore. Shares in BHP Billiton – the largest mining company traded on the FTSE – were down 2.6pc at around 1431.5p Thursday.

These companies have continued to boost production despite a slowdown in demand in a race to gain market and cut costs. Rio Tinto now claims it is producing ore in the Pilbara mines of West Australia for as little as $US17 per tonne.

"The three major iron ore producers are steadily scaling up their production and thus their supply on the seaborne market and thereby crowding less competitive suppliers out of the market," said Commerzbank on Thursday.

"The resulting production cuts and shutdowns are not sufficient to absorb the additional supply, however. Producers in China in particular are no longer profitable. Mine closures there will thus mean that China will increasingly have to import iron ore, though this will hardly help the price in the present environment. The current momentum points to even lower iron ore prices in the short term," said the bank.

As the price of iron ore continues to plummet, capital expenditure among the world's top 10 mining companies is expected to fall to around $US64bn this year, down from almost $US80.1bn two years ago when the industry really started to wake up to the scale of the slowdown in commodities demand, especially in Asia.

Big mining groups such as BHP Billiton and Rio Tinto have also rejected calls from their smaller rivals to place caps on production to support prices.

The most vocal critic of their strategy has been Andrew "Twiggy" Forrest, founder of Fortescue Metals Group – the world's fourth largest shipper of iron ore. Fortescue has been struggling under a mountain of debt and higher production costs than its rivals, stoking fears over its future. Mr Forrest has called for a cap on production and accused his rivals of "incinerating" shareholder value.

Last month, the company was forced to pull a $2.5bn debt refinancing due to unfavourable borrowing conditions.

However, analysts are predicting the iron ore prices may have further to fall before they reach a floor.

"Despite signs of stabilisation emerging from the Chinese property market, overcapacity in the country's steel industry and the onslaught of global iron ore supply growth are keeping sentiment firmly in bearish territory," said the broker Davy.