As the spot price for iron ore continues its unprecedented descent, Australia’s third-biggest iron ore miner, and owner of one of the biggest private railways in the country, Fortescue Metals Group, could be on the cusp of operating below its ‘break-even’ price for the commodity.
FMG outlined a break-even price of US$52 a tonne for its Pilbara iron ore operations, six weeks ago, when the price of iron ore stood at US$65 a tonne.
Making about US$12 a tonne in cash margin translates to roughly US$2bn a year, before any quality discounts, other expenses, taxes and such are taken into account.
But since FMG made that break-even outline, the price has declined even further, dipping as low as US$52.90 overnight.
So the question becomes, has the unthinkable happened? Could Australia’s ‘third force’ in iron ore soon be operating at a loss, just 14 months after prices were at US$140 a tonne?
Analyst views are mixed.
Fairfax reported yesterday that Deutsche Bank mining analyst Paul Young believes FMG is losing cash at spot prices. Credit Suisse’s Paul McTaggert, however, reportedly said the miner could still be making US$2 to US$3 a tonne in cash margins.
Either way, there’s no doubt FMG is in hot water.
That might be why FMG chairman Andrew ‘Twiggy’ Forrest last week made headlines when he more-or-less proposed a production-capping scheme between iron ore producers – a proposal which drew the attention of Australia’s peak anti-competition investigation body, the ACCC.
“The ACCC will be looking closely at Mr Forrest’s comments and the context in which they were made,” ACCC chairman Rod Sims said.
“In general terms, any attempt by Australian businesses to encourage competitors to restrict outputs is a matter of grave concern to the ACCC.
“Ultimately, any success in increasing the price of iron ore in an anti-competitive way would be expected to lead to an increase in prices that Australian consumers pay for items such as whitegoods and cars.”
Forrest made the comments in question at an AustCham event in Shanghai on Tuesday, March 24.
“I’m absolutely happy to cap my production right now,” Forrest said. “All of us should cap our production now and we’ll find the iron ore price will go straight back up to $70, $80, $90.
“The tax revenues which that will generate will build more schools, more hospitals, more roads, more of everything which Australia needs … by a quantum than this foolhardy attitude of deepening your expansions into a falling price.”
In response to the ensuing outcry from economists, commentators and the ACCC, FMG issued a statement late last week defending the comments.
FMG argued that Forrest’s comments were not in breach of the Competition and Consumer Act 2010, as they related exclusively to the export of goods from Australia, and thus were not a contravention, under Section 52(2)(g) of the Act.
FMG chief executive Nev Power backed Forrest’s comments.
“The comments made by the Chairman were highlighting the point that a last man standing fight for market share will damage shareholders of all companies and is not in the long term interests of our host nation Australia nor of our customers and those comments were intended to draw attention to the fact that there is provision in Australia’s competition law dealing with the potential for discussions to be held by exporters,” Power said.
“We believe shareholders will insist that they do not want to see value destroyed and ultimately they will dictate to management that they prefer a focus on profit rather than a focus on market share.”