Freight Rail

Glimmers of hope for iron ore, but how long will it last?

Fortescue Chief Executive Officer Andrew Forrest aboard the first train loaded with iron ore. Photo: FMG


A bounce back in iron ore over the past three weeks has given some breathing room to Pilbara miner and rail operator, Fortescue, and junior BC Iron. But with several forecasts predicting a much lower long-term price, the pair may not be out of the woods.

Since plummeting as low as US$46.70 a tonne at the start of April, the iron ore price has been on the rise, closing at US$58.70 overnight on Tuesday.

While Australia’s ‘big two’ iron ore players – BHP Billiton and Rio Tinto – were still financially safe with the lower iron ore price, the biggest winner in the recent bounce back is undoubtedly Australia’s third-biggest iron ore miner: Fortescue Metals Group.

Estimates on FMG’s all in break-even price for iron ore range from US$53 a tonne to US$50 a tonne, and the miner has said upcoming operational upgrades will reduce costs below US$45 a tonne.

Regardless of where the miner’s break-even is, the rebound in iron ore price is good news, as it more than likely moves FMG from the red to the black in terms of production.

Junior iron ore miner BC Iron, which uses FMG’s railway in the Pilbara, is reportedly now able to produce iron ore at a profit, as well. Analyst UBS believes the junior can break-even so long as the iron ore price stays above US$55 a tonne.

But with several long term forecasts for iron ore still down below US$40 a tonne (Citi’s long term outlook is  a low of US$37 a tonne, and federal treasurer Joe Hockey is said to be working a US$35 a tonne outlook into the May 12 Budget), the miners who are newly back in the black may not be happy for long.

While colourful FMG chariman Andrew ‘Twiggy’ Forrest has blamed major producers for flooding the market with high volumes of iron ore, long term predictions are based more on China’s slowing demand for the commodity.

Prominent economist Ross Garnaut predicted in an op-ed for the Australian Financial Review earlier this month that Chinese steel production will fall this calendar year, meaning that even if global supply slows, iron ore prices will continue to decline.

“From 2007 to 2014, China accounted for more than the whole of the global increase in steel production,” Garnaut wrote.

“Chinese production rose from 489mtpa to 823mtpa. The rest of the world’s production fell from 844mtpa to 839mtpa.”

Garnaut wrote that his Chinese sources believe steel production will fall to just 600mtpa by 2030.

“Falling demand for iron ore will run into the tsunami of new supply from Vale, BHP Billiton, Rio Tinto, Fortescue, Roy Hill, Sino Iron and others,” Garnaut predicted.

“The price trend is down until enough of the old or new supply capacity has been destroyed to balance the decline in demand.”

When Twiggy Forrest was encouraged earlier this month by several commentators to sell off his 33% stake in FMG before it was too late, he dismissed the suggestions, labelling those who spoke out against the mining company as ‘short-sellers’, who were keen to see a dip in the company’s share price so they could buy-low and make a quick profit.

In the past few weeks, it would appear that Twiggy was right, and the accused ‘short-sellers’ have got what they wanted.

FMG’s share price dipped as low as $1.78 on April 13. With the rebounding iron ore price, and a US$2.3bn venture into the bond market late last week which secured the company’s debt situation through to at least 2019, the share price bounced to close at $2.61 on Monday.

But the share price bounce could be seen as a short-term view of a long-term issue. Since peaking at roughly US$190 a tonne in early 2011, dipping below US$100 in 2012 and then peaking again around US$140 in early 2014, the price of iron ore has nose-dived.

And if most analysts are be believed, the short-term rebound in the past three weeks is just that: a short-term rebound.

When the iron ore price was at its lowest, and he was accusing the alleged ‘short sellers’ of panicking the market, Twiggy Forrest suggested a wise businessperson looks not at the short term, but at the long term instead.

“If you’re setting seven-year money, you set it on [what] the company is going to look like over the next seven years,” Forrest reportedly told Fairfax at the time.

“You play a long game, and not be concerned by what might appear in the markets in the morning.”

Indeed, the outlook for FMG and BC Iron may be better now than it was three weeks ago.

But, as Twiggy so rightly said, the short term is not what matters in big business. Long term is key.