Iron ore prices have now reached a
six-year low, are at less than a third of their highs, and show no signs of
stabilising. That the Aussie dollar is as high as it is, albeit well down from
its peak, is a measure of the effectiveness, so far at least, of the Australian
policy of transitioning from a mining-led economy to one that is supported by
local consumption. Not too long ago the merest hint of a drop in the price of
the main component of steel production worldwide would have caused the Aussie
to swoon.
Hard commodities, like iron ore, were
always going to suffer in the wake of the relative slowdown in the Chinese
economy. The drop this time around is extraordinary, however, and is exacerbated
by the fact that the world’s three largest producers, Rio Tinto and Billiton of
Australia and Vale of Brazil, continue to mine for iron ore at full tilt, just
as if there was no price issue at all.
Low
cost miners have their own agenda
Before the drop in price the
Brazilian company, Vale, built a fleet of the largest ships ever to sail the
oceans, as dedicated iron ore bulk carriers. The purpose of this was to greatly
increase the efficiency of, and therefore significantly lower, the transportation
element of their cost of production, so that they could compete for Chinese
business against the Australians, who are geographically much closer to that
market, and against indigenous Chinese miners, who are small and less economically
viable players.
One of the major risks associated with
increasing capacity in large increments, such as when nuclear power facilities
are built, or a fleet of super-duper bulk carriers is commissioned, is that the
perceived need may have evaporated before they are complete, due to the length of time
required to construct them.
That is what happened here. However,
Vale, along with Rio and Billiton, have decided to make a virtue of necessity,
and are now using their superior cost efficiencies to, as they put it, increase
market share, by pumping material into the market regardless of the price implications.
They are not too concerned that one side
effect of this policy is devastation for many of their more high-cost competitors.
Many of these are in China itself, but now Fortescue, a second-tier miner in
Oz, has called for government-imposed price controls to support the price, to
the derision of the big boys. Even the government of New South Wales, where
much of the state revenue comes from mining and is related to the price of iron
ore, is on record as voicing its displeasure at the actions of Rio and
Billiton.
This saga will run and run.
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