BHP thinks iron ore miners in the Pilbara have protection in the form of disposable high cost producers. Pic: Getty Images
Bulk Buys: How the little guys are protecting the iron ore majors
Mining
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- Cost support is still sitting in the US$80-100/t range, BHP says, despite jitters in the Chinese economy and steel market
- Iron ore was back above US$100/t yesterday with marginal ‘swing’ supply now covering a large portion of demand
- BHP not keen on Anglo’s met coal assets after merger fails
BHP (ASX:BHP) continues to remain positive on iron ore despite a cascade of bang average news from the Chinese steel market.
The Big Australian lobbed its financial year results into the market yesterday, the first iron ore miner to face the news since China’s largest steelmaker Baowu rained on their parade by warning of a long, harsh winter to rival the depression of 2015-16 when ‘overcapacity’ in the Chinese steel sector led prices to bottom out at US$38/t.
Since then they’ve crested at US$237/t in the post-pandemic stimulus era of 2021, when booming Chinese demand and restrictions on Brazil’s Vale in the wake of the 2019 Brumadinho dam disaster sent the market haywire.
They’ve pulled back since, with a softening Chinese economy and imploding housing market sending steel margins negative on multiple occasions since late 2021.
Prices recently spent roughly a fortnight below US$100/t, but the level has proved a trampoline, with a recovery again to US$102.05/t in Singapore yesterday. Some market observers think the current spot prices is a function of the collective insanity of traders, who continue to bet on the chimera of stimulus measures from Xi Jinping and the Communist Party.
But BHP sees things differently. The emergence of opportunistic, high-cost suppliers could be the prophylactic that will shield the market’s giants.
BHP, and Andrew Forrest for that matter, sees cost support kicking in at US$80-100/t, levels at which BHP, Rio and Fortescue remain wildly profitable.
A common catch cry for a while from BHP CEO Mike Henry, the latest commodity and economic outlook issued with its 2024 FY results spells out its case in clearer detail.
“We estimate that over 130-140 Mt of supply has a CFR cost above $90/t, with a further 30-40 Mt sitting between $80-90/t, at spot2 exchange rates, freight rates and quality differentials. Of this amount, about 75% is seaborne and 25% is domestic Chinese concentrates,” VPs of market analysis and economic Lee Levkowitz and Wenjun Bao said.
“To persistently dip below the lower end of the cost-support range, some combination of lower demand and higher low-cost supply would have to emerge that meant the approximately 170 Mt of supply (enough to produce 10% of Chinese pig iron) is no longer required.”
That’s a lot of material to come out of the market before a producer like BHP, which claims its Pilbara Ops are at the bottom of the cost curve at a C1 cost of US$15.84/t and unit cost (which includes royalties, stripping and other costs) of US$18.19/t, is heavily impacted.
While the miner’s statutory profit tumbled 39% to US$7.9bn on impairments related to the closure of the struggling Nickel West business and Samarco Dam Failure provisions, its underlying profit lifted slightly for FY24 to US$13.7bn, with a 9% rise in average realised prices at the 285Mtpa WA Iron Ore business to US$101.04/wmt backing a 13% lift in underlying EBITDA to US$18.9bn.
I wanna Simandou you slowly
BHP sees surpluses in the current iron ore market, but that’s a lot of supply to come out of the market before the supposed ‘Pilbara Killer’, Rio Tinto (ASX:RIO) and China’s high grade Simandou project comes into the market.
“Should surpluses persist as we forecast, we would expect some high-cost suppliers to be driven out of the market over time,” BHP thinks.
“How quickly and effectively the Chinese policies targeted at the property sector stabilise it, and the government’s approach to regulating steel production, will both be large swing factors for the remainder of CY24 and into CY25.”
Some explorers and junior miners have already read the tea leaves. Venture Minerals (ASX:VMS) and CuFe (ASX:CUF) have already acted to trade on and monetise small, remote operations that need higher prices to survive. Strike Resources (ASX:SRK) and CZR Resources (ASX:CZR) are selling their nearby Pilbara assets to interlinked Chinese businesses still clamouring for the red dirt. John Welborn’s Fenix Resources (ASX:FEX) tried to future-proof through hedges and by acquiring trucking, port and rail infrastructure in a bid to bulk up and cut costs at its Geraldton hub.
Mineral Resources (ASX:MIN) has switched out the high-cost, short-life Yilgarn operations for the larger 35Mtpa Onslow Iron development, where it hopes to see the economies of scale that have BHP, Rio and Fortescue (ASX:FMG) all selling iron ore at cash costs of around US$20/t.
Levkowitz and Bao, who have taken over economist duties from the erudite Huw McKay, say higher-grade supply from Simandou is now a ‘near certainty’.
“Looking out a few years we consider the entry of new, higher-grade supply from the Simandou project in Guinea to be a near certainty, with first tonnes likely to come in the middle of this decade,” they wrote.
“Additional tonnes are likely to come out of the major suppliers as well, including the plans and studies that BHP has outlined. We also note the ambitions of the Chinese domestic iron ore industry to increase production, while the scrap-to-steel ratio in China is also assumed to be heading consistently higher.”
But BHP’s analysis is understood to have Simandou only really making an impact from around 2027, with its impact ranging somewhere from 60Mtpa and beyond.
The Pilbara miners are hopeful its impact will be not to compete with them but replace the dross. If so, BHP’s hopes of expanding in the medium term to 305Mtpa and longer term to 330Mtpa – studies due next year – may still make sense.
ASX iron ore stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | WEEK % | MONTH % | 6 MONTH % | YEAR % | YTD % | MARKET CAP |
|---|---|---|---|---|---|---|---|---|
| ACS | Accent Resources NL | 0.006 | 0% | -14% | -40% | -25% | -25% | $ 2,838,763.70 |
| ADY | Admiralty Resources. | 0.009 | 0% | -25% | 29% | 50% | 29% | $ 14,665,265.46 |
| AKO | Akora Resources | 0.1 | 0% | -29% | -30% | -39% | -33% | $ 15,060,922.00 |
| BCK | Brockman Mining Ltd | 0.017 | -11% | -11% | -39% | -32% | -39% | $ 157,763,946.23 |
| BHP | BHP Group Limited | 41.35 | 3% | -2% | -6% | -4% | -18% | $ 207,121,318,566.28 |
| CIA | Champion Iron Ltd | 6.02 | 4% | -1% | -22% | 3% | -28% | $ 3,067,157,925.92 |
| CZR | CZR Resources Ltd | 0.235 | -6% | -8% | -15% | 52% | 12% | $ 55,563,524.32 |
| DRE | Dreadnought Resources Ltd | 0.017 | -11% | -23% | -6% | -60% | -43% | $ 63,461,000.00 |
| EFE | Eastern Resources | 0.004 | -11% | -20% | -43% | -64% | -50% | $ 4,967,785.84 |
| CUF | Cufe Ltd | 0.011 | 22% | -8% | -21% | -31% | -21% | $ 14,703,423.52 |
| FEX | Fenix Resources Ltd | 0.3 | 0% | -28% | 22% | 2% | 5% | $ 216,185,376.00 |
| FMG | Fortescue Ltd | 18.63 | 8% | -8% | -32% | -11% | -36% | $ 56,375,847,648.58 |
| RHK | Red Hawk Mining Ltd | 0.77 | -4% | -4% | 20% | 1% | 30% | $ 153,854,838.83 |
| GEN | Genmin | 0.095 | 3% | -14% | -41% | -41% | -41% | $ 65,096,796.42 |
| GRR | Grange Resources. | 0.28 | -2% | -15% | -33% | -43% | -40% | $ 312,481,448.46 |
| HAV | Havilah Resources | 0.175 | -8% | -15% | 17% | -35% | -10% | $ 55,411,861.75 |
| HAW | Hawthorn Resources | 0.062 | 2% | -13% | -23% | -48% | -33% | $ 20,770,968.01 |
| HIO | Hawsons Iron Ltd | 0.022 | 5% | -12% | -33% | -39% | -53% | $ 22,363,030.10 |
| IRD | Iron Road Ltd | 0.075 | 0% | -4% | 29% | -17% | 12% | $ 62,409,343.80 |
| JNO | Juno | 0.03 | -3% | 0% | -55% | -59% | -73% | $ 5,458,357.80 |
| LCY | Legacy Iron Ore | 0.013 | -7% | -28% | -13% | -19% | -24% | $ 100,276,127.41 |
| MAG | Magmatic Resrce Ltd | 0.062 | 5% | 19% | 68% | 2% | 27% | $ 25,857,144.27 |
| MDX | Mindax Limited | 0.056 | 8% | 8% | 40% | 12% | -7% | $ 112,683,107.90 |
| MGT | Magnetite Mines | 0.235 | -11% | -13% | -11% | -41% | -24% | $ 24,047,398.19 |
| MGU | Magnum Mining & Exp | 0.012 | 0% | -25% | -40% | -65% | -57% | $ 9,712,336.84 |
| MGX | Mount Gibson Iron | 0.315 | -5% | -14% | -35% | -26% | -43% | $ 383,781,992.90 |
| MIN | Mineral Resources. | 45.6 | 4% | -15% | -29% | -30% | -35% | $ 8,868,884,598.52 |
| MIO | Macarthur Minerals | 0.07 | 6% | 23% | -42% | -59% | -44% | $ 13,976,585.70 |
| PFE | Panteraminerals | 0.022 | -12% | -31% | -54% | -75% | -58% | $ 8,338,587.64 |
| PLG | Pearlgullironlimited | 0.011 | -21% | -21% | -70% | -52% | -63% | $ 2,249,959.69 |
| RHI | Red Hill Minerals | 3.61 | -8% | -34% | -17% | 5% | -11% | $ 231,500,726.25 |
| RIO | Rio Tinto Limited | 111.88 | 1% | -3% | -9% | 4% | -18% | $ 41,212,424,078.28 |
| RLC | Reedy Lagoon Corp. | 0.003 | 0% | -14% | -25% | -57% | -40% | $ 1,858,622.20 |
| CTN | Catalina Resources | 0.0025 | 0% | -17% | -50% | -38% | -44% | $ 3,096,217.23 |
| SRK | Strike Resources | 0.031 | 15% | -11% | -37% | -47% | -37% | $ 8,796,250.00 |
| SRN | Surefire Rescs NL | 0.006 | 0% | -14% | -45% | -60% | -29% | $ 11,917,846.88 |
| TI1 | Tombador Iron | 0.35 | 0% | 0% | 0% | -36% | 0% | $ 30,218,753.22 |
| TLM | Talisman Mining | 0.2 | 0% | -22% | 14% | 38% | -15% | $ 37,664,069.80 |
| EQN | Equinoxresources | 0.29 | 18% | 0% | 7% | 71% | -3% | $ 35,916,500.87 |
| AMD | Arrow Minerals | 0.003 | 0% | 0% | -40% | 0% | -40% | $ 31,618,095.29 |
| CTM | Centaurus Metals Ltd | 0.35 | 1% | 0% | 40% | -52% | -35% | $ 173,675,484.50 |
| LM1 | Leeuwin Metals Ltd | 0.081 | 1% | -4% | -8% | -72% | -42% | $ 3,794,985.35 |
Coal expansion not on the cards
Meanwhile Mike Henry confirmed to media yesterday BHP would not join the bidding for Anglo American’s Queensland coal assets, which include the troubled Grosvenor mine. That’s despite the fact it would have mopped them up in a failed takeover earlier this year aimed at acquiring the London-listed conglomerate’s copper mines.
Anglo’s Queensland coal assets would bolt on nicely to the remaining mines in BHP’s BMA JV, shipping into the same Indian-led premium hard coking coal market.
But BHP’s ongoing tantrum around Queensland’s 2022 royalty hikes has seen it suspend growth capex there. Perversely, it says the regulatory environment in Queensland it’s complaining about will send prices higher as ESG concerns lead to a dearth of new producers.
“In terms of steelmaking coal supply, most committed and prospective projects are expected to be mid quality or lower, while industry intelligence implies that some mature assets that have historically produced higher-quality coals are drifting down the quality spectrum as they age,” Levkowitz and Bao said.
“According to Wood Mackenzie, new hard coking coal projects will be needed by the early 2030s to meet projected demand under its base case outlook.”
That fear underpinned Japan’s Nippon Steel and JFE Steel’s decision to buy up a minority stake in Whitehaven Coal’s (ASX:WHC) formerly BHP owned Blackwater mine. Smelling blood, thermal coal operator Yancoal Australia (ASX:YAL) suspended its dividend to prepare for an M&A assault on met coal mines, with Anglo’s ~US$4.5bn portfolio the obvious prey.
Anger about the royalty regime has BHP unprepared to invest further in its assets, but the lure of higher prices that has pure plays bullish on Queensland anyway seems to have little sway for the big dog with its continued preference to chase growth instead in ‘future facing’ copper and potash.
ASX coal stocks
Scroll or swipe to reveal table. Click headings to sort.
| CODE | COMPANY | PRICE | WEEK % | MONTH % | 6 MONTH % | YEAR % | YTD % | MARKET CAP |
|---|---|---|---|---|---|---|---|---|
| NAE | New Age Exploration | 0.0035 | 0% | -30% | -13% | -30% | -42% | $ 7,175,595.64 |
| CKA | Cokal Ltd | 0.085 | 1% | 0% | -15% | -35% | -29% | $ 91,710,663.30 |
| BCB | Bowen Coal Limited | 0.013 | -24% | -68% | -77% | -88% | -87% | $ 37,039,328.60 |
| SVG | Savannah Goldfields | 0.024 | 0% | -4% | -20% | -65% | -52% | $ 6,746,037.98 |
| GRX | Greenx Metals Ltd | 0.74 | 6% | -9% | -26% | -23% | -20% | $ 206,830,763.68 |
| AKM | Aspire Mining Ltd | 0.325 | 25% | 2% | 81% | 246% | 210% | $ 164,982,020.13 |
| AVM | Advance Metals Ltd | 0.024 | 20% | -8% | -16% | -78% | -35% | $ 3,249,898.63 |
| YAL | Yancoal Aust Ltd | 5.35 | -10% | -21% | -6% | 4% | 8% | $ 7,064,350,987.95 |
| NHC | New Hope Corporation | 4.7 | -4% | -1% | 3% | -14% | -9% | $ 3,947,716,616.88 |
| TIG | Tigers Realm Coal | 0.004 | 0% | 33% | -33% | -33% | -27% | $ 39,200,107.10 |
| SMR | Stanmore Resources | 3.07 | -3% | -17% | -8% | 9% | -23% | $ 2,803,327,981.74 |
| WHC | Whitehaven Coal | 6.98 | -5% | -11% | 2% | 8% | -6% | $ 5,847,839,480.16 |
| BRL | Bathurst Res Ltd. | 0.715 | 1% | -11% | -15% | -30% | -26% | $ 136,822,242.70 |
| CRN | Coronado Global Res | 1.255 | -2% | -9% | -2% | -21% | -29% | $ 2,120,713,968.45 |
| JAL | Jameson Resources | 0.052 | -5% | -13% | 73% | 2% | 16% | $ 31,758,132.74 |
| TER | Terracom Ltd | 0.195 | 0% | -3% | -25% | -59% | -54% | $ 152,183,584.65 |
| ATU | Atrum Coal Ltd | 0.004526 | 0% | 0% | 0% | 0% | 0% | $ 12,000,798.96 |
| MCM | Mc Mining Ltd | 0.037 | -48% | -74% | -74% | -77% | -75% | $ 15,318,493.91 |
| DBI | Dalrymple Bay | 3.15 | 2% | 4% | 13% | 16% | 17% | $ 1,536,861,167.70 |
| AQC | Auspaccoal Ltd | 0.185 | 23% | 95% | 153% | 36% | 85% | $ 98,753,170.94 |
