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Business/Robbery etc

Iron Ore’s Vale of Tears

28 February 2015

9:00 AM

28 February 2015

9:00 AM

It was hidden away last week in the finance pages. But it will have a far greater impact on Australians than is normal for an overseas iron ore mining company’s annual production report. Brazil’s Vale just happens to pose the greatest single threat to Australia’s largest export income earner – iron ore and to prospects of the Australian economy (and the government’s finances) emerging speedily from the serious consequences of the collapse of the mining boom. Vale’s latest report shows why Western Australia’s Premier Colin Barnett, who has accused Australia’s two biggest and most efficient iron ore exporters of ‘working in a concert way…to flood the market as a corporate strategy to push down the price of iron ore’, which is ‘hurting Western Australia’, should pull his head in. And so should the other WA iron ore miners like Fortescue Mining whose CEO, in announcing an 81 per cent profit slump, blamed Rio Tinto and BHP for the plummeting ore markets.

The threat from Brazil is far more serious now that China’s steel production (making up about half the world’s total) is falling so that demand for imported iron ore has stalled but capacity to mine it has boomed. Last week, Vale, by far the world’s biggest iron ore producer, revealed the first practical evidence of its mounting threat to Australia’s iron ore exports to China.

In reporting its 2014 production of 320 million tons of iron ore (far more than Rio’s 280 million tons and BHP’s 200 million tons), it showed that its massive 50 per cent expansion plans (the announcement of which in the middle of last year seemed to precipitate the slump in iron ore prices) is already beginning to bear fruit. Last year’s modest 6.5 per cent rise, however, is only the prelude to the next five years’ lifting of its annual iron ore production to 460 million tons – involving an ominous doubling of its current China exports of 170 million tons.


All this is at a time when Brazil’s competitive cost disadvantages against Australia’s major exporters is diminishing. Although Vale’s production costs are in the same $US20-25 per ton ballpark as BHP and Rio, Vale has suffered in the past from the cost burden of around an extra $12 a ton for a much longer sea voyage. But two changes have been to Vale’s advantage: firstly, the extraordinary collapse of oil prices and therefore bunkering costs of bulk carriers has brought greater benefits to Vale’s longer voyages, and secondly, Vale’s huge Valemax 400,000 ton bulk carriers have, after a three year stand-off, been allowed to access Chinese ports, saving Vale up to $5 a ton. And to help a bit more on the costs front, the Brazilian Real has depreciated faster than the $A.

So, aided by lower prices that should clear out some higher cost Australian competition, Vale is set to reverse the trend that last year had Australia increase its share of Chinese iron ore imports from 51 per cent to just under 60 per cent, while Brazil’s dropped to 18 per cent.

A chilling warning to those miners whose costs exceed the current price came directly from Vale itself when its top iron ore executive was announcing Vale’s plan to double its exports to China: ‘Only the big suppliers with world-class assets, scale of production, efficiency and good costs will be able to survive’.

So this is not simply a local issue of Australian companies trying to kill off high-cost competitors; this is an international play where Australian low-cost/high profit companies are fighting a Brazilian competitor for market share. As an American analyst noted when China lifted its ban on Vale’s 400,000 tonners, ‘it is in China’s best interests to keep Vale competitive to ensure that Rio and BHP don’t get too cocky – BHP especially’.

So forget about Premier Barnett’s attempts to ‘shame’ Rio and BHP into not utilising (at a handsome profit) the new capacity they have spent billions of dollars developing, especially as the main beneficiary would be Brazil’s Vale rather than higher-cost Australian miners. As BHP’s CEO Andrew Mackenzie noted, if Rio and BHP reduced output, they would be giving up revenue, employment, royalties and taxes with the result that we ‘would have simply ceded production to other countries who would have taken up that slack’. Like Brazil’s Vale.

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