DCI: But what about iron ore, the world’s most heavily traded seaborne commodity?
TA: As for iron ore, we are pleasantly surprised to see this rebound in prices in the sea-borne market. It’s principally driven by seasonal factors. Margins have improved for Chinese mills. Usually around this time of year, ore prices tend to be stronger. You have a combination of steel mills getting ready to build up stocks ahead of Chinese construction season start and then buying is triggered by cyclones in Australia and difficult weather condition in Brazil. In the first place drop in iron ore prices was overdone. Lots of producers were losing on cash flows. I think ore prices are looking for equilibrium. In the near term, some big producers have capacity expansions under progress. So we have to be ready to mine iron ore preferably at prices lower than today.
DCI: Industry’s brave hearts Rio Tinto, BHP and Vale took the position that in no case they would regulate production to keep prices at higher levels which would help smaller producers to survive. They all have excellent economies of scale and even if ore prices fall to $25 a tonne, they will still be making money. Though margins will remain highly squeezed.
TA: What’s happening in iron ore is no different from what is happening in other sectors. Smaller producers want bigger ones to reduce their production so that they can make money. You are right there have been quite a bit of expansion in iron ore mining capacity on the basis of continued growth in global Chinese steel production. Now it has slowed and that’s having an effect on the current market environment. As for iron ore expansion, once it’s complete the flywheel starts spinning. It just goes on and on. You can’t stop it. It will be value-destructive to stop that flywheel.
DCI: Where will iron ore prices stabilize?
TA: In this low iron ore price market, small players will tend to leave the supply base, particularly in China. Then a lot less capital is spent in new mines. Fringe businesses in China and West Africa have been hit particularly hard. I am familiar with the West African supply side and miners there are devastated at these prices. You have seen a supply side reaction in China. It has caused Chinese steelmakers to rely more on seaborne supply; possibly the upcoming restructuring in the Chinese steel sector will further that. Coastal mills relying on imported ore, armed with modern, less labour-intensive processes and strategically placed to export steel products will be spared the pains of restructuring unlike the old inland units. You will see overall Chinese steel growth slowing and therefore, the country’s iron ore consumption. Chinese domestic miners will take the hit most. On percentage terms, mills there will be using a higher percentage of ore from seaborne market.