Iron ore prices remain near multi-month highs, according to data from Metal Bulletin.

As such, and despite wide discrepancies in prices for individual grades, Macquarie Bank says that means almost all major iron ore seaborne producers are making money at current levels.

“Virtually all of the producers we covered are in the money as prices are well above the seaborne marginal cost (SMC), which is in the $65-$70 a tonne range,” Macquarie says.

“With the exception of high-cost magnetite operations in Australia, miners selling lower grade sinter fines [with iron content of less than 60%] are still the marginal suppliers of the seaborne market.”

This chart from Macquarie shows operating margins for major seaborne iron ore producers in the second half of last year, along with its forecasts for the March quarter of 2018:

Source: Macquarie Bank

Macquarie says it used averages for spot freight rates and exchange rates in the December quarter last year to calculate the breakeven price on a company by company basis.

On the recent price discount being applied to lower iron ore grades, partially driven by reductions in Chinese steel output that have seen mills favour more efficient higher grades, Macquarie says profitability among firms higher up the cost curve is now being impacted.

“Both Atlas Iron and the Asia Pacific division of Cliffs — which account for around 20 million tonnes of low grade Australian supply — reported slight EBITDA losses in Q4 2017 when the price averaged $65 a tonne and low grade discounts widened to around 30%,” it says.

“We reiterate our view that if low grade discounts stay at current levels throughout 2018, then a benchmark price in the high-60s is required to keep 92 million tonnes of low grade supply in the market.”

Underlining that point, Macquarie says the impact of widening price discounts is now becoming visible in trade flows.

“Low grade supply has started exiting the market,” it says.

“Indian exports never recovered post-monsoon [while]… shipments from Mauritania and Sierra Leone have also been on a declining trend.”


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