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Vast new supplies of iron ore hitting the market amid a slowdown in Chinese steel demand have driven seaborne prices of the raw material to their lowest level in years.
Iron ore prices fell to just over $90 per tonne cfr China at the end of May, the lowest level seen since a supply-driven crash in August 2012.
It emerged last week that BHP Billiton, the world’s largest mining company, is planning a series of cutbacks in Australia, at both its Perth iron ore headquarters and at its Mount Whaleback mine in the Pilbara.
Around 300 jobs are expected to go as the company looks to rein in its costs.
Jobs and operations costs may be under pressure, but output continues to grow despite a perceived slowdown in Chinese demand growth.
Credit Suisse analyst Lachlan Heysen told Steel First that there was no short-term incentive for miners to cut production at these prices, despite the huge impact that a significant drop in prices could have to their bottom lines.
“Listed producers won’t cut back production, they have quotes to stick to,” said Heysen. “They would rather cut down headcount that hold back tonnes, it will save them more money.”
Australian miner Fortescue Metals Group (FMG), which only started producing iron ore in 2008 and is already the world’s fourth-largest producer of the raw material, continues to pump new tonnes of material into the market regardless of the collapse in price.
Ramping up to an annual run rate of 155 tpy in March 2014, FMG's export volumes have rocketed. The miner has paid the cost for ramping up shipments into a weak market and announced in May that it was to offer discounts for material delivered in June.
The speedy ramp up of FMG’s output has coincided with huge output expansions at iron ore majors Rio Tinto and Vale.
Rio Tinto’s board gave the go ahead to its expansion to 360 million tpy at its Pilbara iron ore operations late last year. New tonnes from its operations, including its Yandi mine, have flooded the market, contributing to oversupply.
May's iron ore price drop of more than $10 per tonne will have seen more than $2 billion wiped out from Rio Tinto's bottom line said Heysen.
"Miners, especially the big ones, can bear these sorts of losses, but only for short periods of time," he added.
If even the big miners are making cuts to their operations, the pain felt by smaller outfits, saddled with higher production costs, will be acute.
Pellet producers Cliffs Natural Resources and Grange have put cost-cutting plans in place and have warned investors and employees that more cuts are yet to come.
Meanwhile, shipments from the world’s biggest iron ore export hub, Port Hedland, have increased to record levels, with shipments reaching a huge 36 million tonnes in May.
While prices edged back up a few dollars in the first week of June as bargain-hunting funds and Chinese traders swooped into the market, the glut of new supply hitting the market means that any short-term recovery in prices is unlikely.
And with the Chinese government cracking down on irregular financing – a move that has already hit steel mills in Shanxi and Hebei provinces – the prospects for the country's steel industry absorbing all the new tonnes of iron ore supply hitting the market even at a rate of modest growth, are weak.
Suppliers of coking coal, another steelmaking raw material, have been hit even harder than iron ore producers.
Coking coal prices dropped in the second quarter of 2014 to almost a third of the value they held in 2011.
In just the last six months values have fallen by around 30%, with Steel First's premium hard coking coal index fob Australia falling from levels of over $145 per tonne in November to under $110 per tonne at the end of March.
China, the world's largest importer of coal, boasts its own plentiful supplies of the steelmaking raw material. It largely imports coking coals whose grades complement its domestic output, with mills creating blends to match their own specifications.
Despite demand being weak, Australian producers have largely continued to pump out material.
Many are tied into take-or-pay infrastructure contracts, which means they have to pay for rail use even if they are not moving tonnes. So in a bid to cut costs, producers have ramped up output.
With an increasing volume of tonnes coming onto the market and demand from China remaining slack, Australian producers slashed prices and offered raw materials to Europe and Turkey – markets more traditionally served by US coking coal miners.
Several high-cost mines succumbed to the increased competition and low-cost environment.
And now even Australian miners are feeling the pressure.
Brazilian mining major Vale announced plans to mothball its Integra coking coal mine in Australia in May, citing poor market conditions for the decision.
May also saw Anglo-Australian mining major Rio Tinto slash headcount at its Hail Creek hard coking coal mine.
Back in April BHP Billiton's Illawarra Coal announced it was undertaking an organisational review, which could result in changes in the business, including job cuts. And in May, reports emerged that the miner had slashed a number of jobs at the mine.
Sources told Steel First that industrial giant Wesfarmers' coal mining arm, Curragh, had also slashed jobs, although the bulk of these were voluntary redundacies and cancellations of contractor contracts,
Prior to these cuts, BHP Billiton Mitsubishi Alliance cut 230 jobs at its Saraji mine in February, while Anglo American cut 200 contractor jobs at its Dawson mine in November last year.
Glencore has cut more than 40 jobs at its Tahmoor coking coal mine, according to press reports.
Workforces have borne the brunt of the recent wave of cutbacks among Australia's coking coal miners, but if prices fall much further, production is also expected to be cut.
"There's really not much further prices can go," a coal trader told Steel First.
"Coking coal isn't like iron ore where there's still around $60 dollars to go before some of the biggest miners hit cost of production. In coal, we are already there. This is the bottom. Any further drops and people will go out of business."
Tumbling prices and slack demand have seen Australian steelmaking raw material producers scrambling to cut costs and protect their margins. Steel First looks at which miners have been affected.