Iron Ore Won't Rebound Any Time Soon

Why Iron Ore Won't Rebound Any Time Soon

Economists may teach that low prices and declining demand encourage producers to decrease supply, but the iron ore industry appears to have skipped class that day.

"The combination of a further increase in global iron ore supply this year and only subdued demand growth suggests iron ore prices will continue to drift lower," said Caroline Bain, an analyst at Capital Economics, in a note Monday. She forecasts iron ore prices at $60 a tonne by year-end, with risks to the downside. Iron ore touched a more than five-year low Monday of around $63.30 a tonne, although some forward contracts are already pricing it under $60.

Output has picked up over the past few years, encouraged by expectations China demand would continue to post strong growth and by low production costs in Australia and Brazil, she said. She noted Rio Tinto and BHP Billiton put their average production cost in Pilbara, where most of Australia's iron-ore production is located, at around $25 a tonne, compared with 2010-13 average market prices at $145 a tonne. Even at current prices, these producers are still profitable, Bain noted. Australia is the world's second-largest iron-ore producer after China.

Despite 2014's around 50 percent decline in iron ore prices, the big four producers -- Vale (Sao Paulo Stock Exchange: VALE'A-BR), Rio Tinto, BHP Billiton and Fortescue (ASX:FMG-AU) - continue to expand production and other companies are also bringing projects on line this year, she said, forecasting Australian production will rise 6 percent this year, although that's down from 2014's 20 percent rise.

Don't count on China

At the same time, despite China producers' higher costs and lower ore grades, production there isn't likely to see much slowdown, especially as many steel plants have "vertically integrated" operations, owning mines nearby, Bain said. Closures on the mainland are likely to focus on less efficient operations, leading to a leaner and meaner industry there, she said.

"The multinational producers will be only partially successful in their bid to oust higher-cost producers globally and oversupply will continue to weigh on prices," she said. At the same time, China's iron ore usage will stagnate at best, hit by a combination of high inventories and lower demand to use the metal as part of financing deals, she said.

Goldman Sachs also expects iron ore producers won't be able to count on China for growth, noting it's become a mature market.

"The decade-long love affair between China and iron ore is cooling. Chinese steel consumption has increased to unsustainable levels and is bound to decline," it said in a note Friday. "Significant overinvestment to date will ensure that the market is well supplied."

It expects a "long war of attrition" will be needed to balance the market, cutting its long-term price forecast by 25 percent to $60 a tonne.

The Oil Effect

Falling oil prices are also set to weigh on iron ore prices, as they result in "substantial cost reductions", and commodity prices are likely to fall to meet these new lower levels, Citigroup said in a note Monday.

It's also concerned about oil-fueled deflationary pressures affecting commodity demand. 

"Falling prices increase the real cost of debt repayments and could see increased defaults. This not only affects direct commodity demand, but also drives lower inventories and threatens commodity financing trade," it said, noting that falling commodity prices also leave companies with little incentive to build up inventories.

In a note earlier this month, the bank cut its 2015 iron ore price forecast to $58 a tonne from $65

Miners to Reveal Impact of Iron Ore Price Slump

Miners to reveal impact of iron ore price slump

It is well and truly a buyer’s market in iron ore and this week we should find out the extent of the damage for some of the smaller players.

With iron ore prices now below $US70 a tonne after falling by half and still threatening to go lower, there are serious doubts that the full complement of miners will survive the downturn.

While the big, low-cost players Rio Tinto and BHP Billiton are still ramping up production, the smaller operators are struggling, with Atlas Iron admitting it was losing money in the December quarter until oil prices dipped and returned it to slim profitability.

Chinese Government-backed Citic has announced it will be writing down the value of its Sino Iron project in Western Australia by up to $2.2 billion and further writedowns of up to $2.3 billion have already been flagged by Atlas, Mount Gibson Iron, Gindalbie Metals and Grange Resources.

On Thursday it is the turn of number three player Fortescue Metals to outline its December quarter production figures and perhaps give some guidance as to its profitability at current prices.

Fortescue chief executive Nev Power has already been critical of WA government plans to offer a 50 per cent iron ore royalty rebate to smaller players while prices are below $US90 a tonne, a move designed to keep them going in a really tough market.

BC Iron’s second quarter production is also out on Friday.

Other struggling commodities may also produce some surprises with copper/gold miners OZ Minerals, PanAust and Sandfire Resources all reporting quarterly production on Wednesday, along with oil and gas companies Beach Energy and Oil Search.

While copper and oil have both been dropping, at least gold has been heading in the other direction, which may become apparent with struggling gold giant Newcrest’s quarterly production on Friday.

The focus will also be on continuing reaction to the European Central Bank’s more than €1 trillion stimulus package, and also inflation figures due on Wednesday.

Iron Ore Warning: High Spending Days Are Over

One of the world's largest investors in mining stocks, BlackRock, has been out and about over the past week issuing warnings to the major resource companies. 

The iron ore price has hit a five-year record low and BlackRock wants to push a message to management - avoid reverting to the high spending expansionary ways and stay focused on cutting costs and rewarding shareholders.

Evy Hambro, whose team manages more than $20 billion across multiple funds for BlackRock, doesn't seem to explicitly mention whether he includes big iron ore producers chasing increased production among the list of management's bad habits - or whether he thinks the likes of BHP and Rio are ultimately shooting themselves in the foot, given that massively increased supply is a significant factor on the weakening price of the metal.

There is plenty of unconfirmed talk that this is the message that BlackRock has conveyed to the likes of BHP Billiton (in which it is the largest shareholder) and Rio Tinto.

One of the larger culprits in a supply-flooding sense is Fortescue which, percentage wise, has grown much faster than its larger competitors. However the genesis of its expansion plans dates back many years and its target production level has now been reached. 

Fortescue's shareholders are unlikely to see any further volume expansion beyond sweating the existing assets a bit harder.

The ripple effect of the continuing fall of the iron ore price is an issue that is now becoming mainstream. It has major ramifications for the country's exports and governments' tax revenue and thus the broader economy.

To date the large mining companies in Australia have been able to offset last year's lower commodity prices for iron ore and coal by undertaking major cost cutting drives and efficiency initiatives.

But if prices continue to fall and much of the low hanging fruit has been harvested, revenues and profits will be under pressure.

While we can't blame everything on oversupply, given there are seasonal demand factors from the Chinese customers that come into play - the latest of which is that country's weak property market - the fact remains that the Australian producers in particular have been pumping out enormous volumes of iron ore into the seaborn market.

The immediate focus for the Australian iron ore industry has been the health of the smaller mining companies with cash costs close or in excess of the current iron ore prices. How much longer can they last and is this the start of a wave of consolidation?

Western Desert Resources, a company unknown to most, became the canary in the coal mine last week when it had receivers appointed to it. It was the iron ore plaything of hotel billionaire Bruce Mathieson, and had plenty of high-profile directors on the board - with loads of experience across business. Sadly not much in mining.

How the industry shakes out from here depends on which of the smaller players are attractive to those looking for a cheap entry and the agenda of the buyers.

There may be some consolidation between the smaller players - and how this pans out depends on which have cash. BC Iron recently made a $250 million bid for Kerry Stokes' iron ore play, Iron Ore Holdings.

Earlier in the year the Chinese group Baosteel moved into the market in a joint bid with rail infrastructure group, Aurizon for Aquila Resources.

New York-based financier Edward Sugar - a man who helped Fortescue find finance in its early days and who was in Australia last week - suggested there were billions of dollars waiting in the wings looking for resources projects.

He says that private equity players that have traditionally not stepped into the mineral resources space are now assessing whether there are opportunities stemming from the fallout from the financially wounded or the asset sales from the bigger mining stocks that are looking to focus their core portfolios. BHP Billition and Rio are clear examples.

The interest from these private equity groups and other funds set up to invest in mining assets generally - like that formed up by former Xstrata boss Mick Davis - are scouring Australia, the UK and Canada in particular.

UBS' Glyn Lawcock has just released a useful update on the price iron ore (62 per cent Fe which is the one traditionally used) needs to be for companies to hit cash break-even.

For Rio (best in show) it is US$45, BHP needs an iron ore price of US$50 and Fortescue needs a price of US$74. The first two are looking pretty comfortable at this price and FMG will hope to further reduce its costs in order to make a decent return at current price levels.

But the next layer down the smaller iron ore producers hit break even above where the iron ore price is today. The exception in Mount Gibson and BC Iron which have a bit of additional head room.

These producers can not afford to ride out a protracted period of weak prices. 

And there is enormous disparity among those in the industry, the investment banks commodities experts and even the Australian state and federal treasuries about the outlook.

Lawcock for example thinks the price might pick up a bit in November and December (as it usually does).

But not even the most optimistic are suggesting that the days of super profits from this industry are set to return. It's a business that can generate good returns if costs are low but the days  of justifying the massive capital costs of building rail and port infrastructure from scratch appear to be a thing of the past.

You Can't Have Solar Without Silver

You Can't Have Solar Without Silver

With a history that dates back more than 5,000 years, silver has been an incredibly valuable metal through the ages. It was once used as a trading currency along the Asian spice routes and was even the standard for U.S. currency for a while.

However, the precious metal holds far more value than just as a currency. In fact, more than half of the world's silver is actually used for industrial purposes as it is used in X-rays, low-e windows, and even solar panels. As it turns out, even solar energy wouldn't work the same way if it wasn't for silver.

Making Solar Shine

Silver is a unique metal. It has the highest electrical and thermal conductivity of all metals, and it's the most reflective. These physical properties make it a highly valued industrial metal, especially when used in solar cells.

Silver is actually a primary ingredient in photovoltaic cells, and 90% of crystalline silicon photovoltaic cells, which are the most common solar cell, use a silver paste. What happens is that when sunlight hits the silicon cell it generates electrons. 

The silver used in the cell works as a conductor to collect these electrons in order to form a useful electric current. The silver then transports the electricity out of the cell so it can be used. Further, the conductive nature of silver enhances the reflection of the sunlight to improve the energy that's collected. Therefore, if it wasn't for silver solar wouldn't be as efficient in turning sunlight into energy.

Shining a Light on Silver in Solar

The average solar panel actually uses about two-thirds of an ounce of silver, which is about 20 grams. That might not sound like a lot, but at around $20 an ounce it contributes more to the cost of solar than it does to the other industrial products that use silver. For example, a laptop only contains 750 milligrams to 1.25 grams of silver while a cell phone contains just 200-300 milligrams of silver, so silver is a tiny fraction of the cost of those devices.

Overall, the solar industry uses about 5% of the world's annual silver supply, or an estimated 52.4 million ounces. However, as demand for solar increases, especially in China, the demand for silver used in solar could double. Because of this it is estimated that by next year the solar industry will use 100 million ounces of silver.

Because of the volatility in the price of solar, panel makers are working on using less of it on each panel. Still, the overall increase in demand for new solar panels is what's driving the demand silver used by the solar industry. 

This increased demand for silver could have a real impact on the solar marketplace in the years to come as solar could push up the price of silver. So, should silver prices surge it could have an impact on the production costs of solar panels, which would then impact the economics of the solar industry.

Final Thoughts

Silver is a precious metal to the solar industry. Because of this any future spike in the price of silver could hold back the growth of the industry. 

It's a trend to keep an eye on as surging silver prices could dim the prospects of the solar industry in the future because it's becoming such a large consumer of the precious metal.