By Jasmine Ng & David Stringer at Bloomberg
Iron ore’s tumble into the $30s threatens the world’s biggest miners as prices approach break-even costs, according to Capital Economics Ltd. BHP Billiton Ltd. shares slumped to the lowest in 10 years and Rio Tinto Group dropped to the lowest since 2009.
The most expensive operations at the four largest suppliers are on the verge of making losses at rates below $40 a metric ton, said John Kovacs, senior commodities economist at Capital Economics in London, who estimates their break-even levels at $28 to $39, taking into account freight and other costs. While these producers will keep output strong, they’ll be constrained by low prices, he said by e-mail on Monday.
Iron ore’s plunge below $40 comes as producers including Vale SA in Brazil and Rio and BHP in Australia press on with expansions to cut costs and defend market share just as demand from the largest consumer China slows. They’re the world’s biggest suppliers along with Fortescue Metals Group Ltd. Prices of the raw material have lost 45 percent this year and have plunged 80 percent from their peak in 2011.
“The big four will find it hard to maintain output at below $40,” Kovacs said in response to questions. “If prices remain weak, output from the highest-cost mines of the big four will be under pressure.”
Ore with 62 percent content delivered to Qingdao sank 1.1 percent to $38.65 a dry ton on Monday, a record low in daily prices compiled by Metal Bulletin Ltd. dating back to May 2009. The raw material peaked at $191.70 in 2011.
Kovacs said that while rates will stay low over the next year, he doesn’t believe they’ll remain below $40 for a significant length of time. He expects prices to recover slowly because demand won’t fall much further and the biggest miners will find it difficult to keep up output at these levels.
Mining company shares retreated. BHP declined 5.2 percent to A$17.05 in Sydney, the lowest since 2005. Rio dropped 4.3 percent to the lowest in more than six years and Fortescue closed 3 percent lower. Top producer Vale fell as much as 7.7 percent to the lowest since 2003 on Tuesday in Sao Paulo, while Cliffs Natural Resources Inc., the largest U.S. producer of iron ore, slid 3 percent in New York.
UBS Group AG estimates that of the four biggest producers, Fortescue has the highest break-even cost of $40 and Vale’s is $34 in terms of ore landed in China with 62 percent content including interest. BHP’s break-even level is $29 and Rio’s $30, the bank’s data show.
“There is not much production outside of the big four that can make money at these levels -- eventually, we should see the juniors be forced to cut production,” said Jeremy Sussman, a New York-based analyst at Clarksons Platou Securities Inc. “It can also take some time for uneconomic production to come offline.”
The top mining companies have justified their strategy. In response to questions on Tuesday, Rio Tinto referred to comments last week in Perth by Andrew Harding, head of its iron ore business, who told reporters the unit was “set up to deal with long-term price outcomes, and deliver great margins over the long period of time.”
BHP said Chief Executive Officer Andrew Mackenzie set out the company’s view last week, saying the producer remains “relatively bearish about the long-term projections for prices,” of steel and its raw materials, including iron ore.
“Fortescue has worked hard to ensure we can respond to market conditions,” CEO Nev Power said in an e-mail. “As one of the lowest cost iron ore producers in the world, we will continue to drive productivity, efficiency and cost improvements to maintain our strong financial position.”
Luciano Siani, Vale’s chief financial officer, said last week the company will continue to lower its break-even costs so it can deliver cash flows no matter where prices may be.