Long-term success will be challenging for cost-cutting miners

By Stephen Bartholomeusz

Last year the iron ore price averaged around $US130 a tonne but, with China’s demand softening and production volumes rising strongly as Rio, BHP and Fortescue poured new capacity into the market it has fallen below $US100 a tonne this year, with the spot price now around $US96 a tonne.

It is worth noting, however, that while Rio did an outstanding job of countering the price declines to date with its cost cuts and volume increases and that the division’s EBITDA of $US8bn was higher than the $US7. 64bn generated in the previous corresponding period, it was lower than the $US9. 8bn of EBITDA it produced in the second half of last year.

Given the cost and quality advantages of the two biggest Pilbara producers, there isn’t an alternative strategy to the volume-driven response to price declines even if their own actions exacerbate the over-supply of iron ore and therefore exaggerate the price impacts.

Traditionally the second halves of calendar years are the seasonally weaker part of the year for China’s demand for iron ore, so it would be unlikely that the price would rebound over the next few months even if supply weren’t increasing.

The Rio Tinto interim result (Walsh fires Rio to a roaring success, August 7) showed that the strategy of carving into costs while ramping up volumes that is being pursued by the major miners has worked to offset commodity price declines.

Read more here: Business Spectator


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