You have to feel for Australia’s iron ore mining minnows.
When they set up their business, borrowed from the banks and built mines, they probably knew that a wall of production, from themselves and the big boys, would eventually drive prices down.
But, it’s unlikely they thought the price would fall back to levels not seen since before the GFC. At least the break-even prices of many smaller producers, either under water or having shut production now, suggests they got something wrong.
Professor Ross Garnaut argues the industry miscalculated the demand side of the equation. He told the AFR that while the big miners and Australia’s official forecaster are predicting a surge of steel making toward 930 million tonnes in five years time, China is past its peak in production.
That’s bad news for prices as the supply surge continues.
Worse still, on the day Atlas Iron requested a trading halt of its shares, it seems the pressure continues to grow on miners as prices fall.
Reuters reports this morning that buyers in China are breaking from tradition, where the price is set on the basis of an average price prior to delivery, and requesting prices be set in a shorter window, closer to the delivery date, when they take possession of the cargo.
That’s a clear signal that buyers think prices will continue to fall. And it’s also a signal that reinforces the dominance and power of the larger miners, which have lower break-even production levels and can withstand a further drop and continue to be profitable.
Prof. Garnaut said the big miners have a “last-man standing” approach. That, combined with the actions of Chinese buyers, suggest iron ore is still looking for a bottom in prices.