| | | A slump in shipping costs has made Vale the lowest cost producer, according to Bernstein Research. On an all-in basis — including mining costs, freight and value in use premium — it reckons the Brazilian company has leapfrogged Rio and BHP.
Falling oil price fuels lower costs for miners
Neil Hume, Commodities Editor
Iron ore market sees change of order due to cheaper shipping
Who is the lowest cost iron ore producer of them all?A couple of months ago the answer to that question was relatively straightforward — Rio Tinto with BHP Billiton a close second.
The two miners can dig ore out of the ground in Western Australia and ship to China, the world’s biggest consumer of the steelmaking ingredient, for less than $50 a tonne. For reference, the current spot price is just under $70 a tonne.
However, the rout in the oil markets, which has seen the price of Brent crude slump by more than 50 per cent in past six months, is threatening to reorder the cost position of the global iron ore industry.
A slump in shipping costs has made Vale the lowest cost producer, according to Bernstein Research. On an all-in basis — including mining costs, freight and value in use premium — it reckons the Brazilian company has leapfrogged Rio and BHP.
Freight costs have dropped dramatically in the past six months because of sharp decline in the price of bunker fuel, the type of oil used to power large ships.
As such, the average cost of moving iron ore from Brazil to China has fallen $11 a tonne, against a five-year average of $23 a tonne. Australian producers, have also seen their cost drop but not by the same degree, from $9 to $5 a tonne.
At $6 a tonne Bernstein analyst Paul Gait says the freight differential between the Australian producers and Vale is no longer enough offset the “superior” cost profile of Brazilian producers.
Of course, lower fuel prices will benefit the entire mining industry not just Vale. Fuel costs represent close to 10 per cent of overall costs for a miner, and potentially more for those with large open-pit mines and high stripping ratios. This is because they need large fleets of gas-guzzling trucks to move rocks around.
But falling diesel and fuel oil prices are also a double-edged sword because they make high-cost producers more resilient to lower prices. This is important in oversupplied commodities such as iron ore where capacity needs to leave the market in order to balance prices.
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As a reminder, iron ore dropped more than 50 per cent last year as a flood of new supply hit the market, overwhelming demand. Ominously, more supply is set to come on stream this year.
CRU, a consultancy, reckons a fall in oil prices to an average of $67 a tonne in 2015, from $100 in 2014, will lower the global iron ore cost curve by an average of $4.60 a tonne. Small, high-cost miners in China, which use a lot of fuel, will also benefit with operating costs falling $4.80 a tonne.
This is bad news for the iron ore market because it is precisely these producers that were supposed to buckle under the pressure of lower prices and exit the market this year. Instead they have been thrown a lifeline. With depreciating commodity currencies helping second-tier producers outside China, hopes for a recovery in iron prices in 2015 look increasingly forlorn.
The Commodities Note is an online commentary on the industry from the Financial Times |
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