Bulk Buys: Fitch sees iron ore output ramping up across the globe, but history shows that’s easier said than done
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A new report from ratings agency Fitch suggests iron ore producers across the globe are set to head into a mode of steady growth, with production expected to lift by ~361Mt by 2026.
That would see the supply of iron ore rise ~2.7% annually to 2026 with Brazil’s Vale the biggest contributor.
The global iron ore market is around 1.5Bt a year, around 70% of which gets sold into China.
Fears of a supply glut have been ratcheted up for several years, headlined by suggestions a Chinese consortium could work with Rio to finally deliver the slow moving Simandou mine in Guinea, which could deliver 80-200Mtpa into the seaborne market from the second half of this decade, depending on who you ask.
Fitch thinks iron ore output will rise slower in the five years to the end of the decade by around 1.1% before stagnating as prices come off the boil.
It expects prices to average US$120/t in 2022 before dropping back towards levels where only operations with low cost bases — like those owned by the Pilbara majors — will hold strong.
But iron ore output, like many of the highly anticipated things in life, always seems to disappoint.
Rio Tinto has made ripper multi-billion dollar profits in recent years and paid hefty dividends to shareholders.
The completion of its new Gudai-Darri mine last week may prove a turning point for the company.
The 40-year, 43Mtpa mine came in $500 million over budget but is the first of a string of replenishments planned by the company after the nosedive in iron ore prices from 2013-2015 prompted it to put its chequebook back in its pocket and delay required replacement investments.
However, the majors have issues on the horizon with the long approval times for new mines (Rio is in the environmental approval process for its Western Range extension) as well as added scrutiny on Aboriginal heritage after the company blasted culturally significant rock caves at Juukan Gorge to smithereens a couple years ago.
Then there is the current labour and construction market in WA, which is putting additional pressure on costs and development timelines.
Vale has also been a serial offender when it comes to missing ambitious export targets, especially in the aftermath of the 2019 Brumadinho dam disaster, a tragedy from which its output has not fully recovered despite persistent ambitions to hit an as yet unfulfilled 400Mtpa production rate.
“If we look at supply there’s not been a lot of new news, but essentially we’ve seen the same story that we’ve had for some time now, which is relatively restricted production by the major iron ore companies by BHP, Rio and FMG,” iron ore market expert Mark Eames, chairman of ASX-listed explorer Magnetite Mines (ASX:MGT) told Stockhead in an interview this month.
“There’s been limited progress, so no new large scale projects really progressing.
“There’s a little bit of more talk about, for example, Simandou in Africa, but there’s a long way to go, so I think what we’re seeing is still relatively positive conditions for iron ore in terms of supply and demand.”
Where there are more questions over that supply and demand matrix is in China, producer of almost 60% of the world’s crude steel.
While it hit an almost year long high of 96.6Mt of steel production in May, a staggered exit from China’s crippling Covid-19 lockdowns has hit confidence that steel producers will see stronger demand from the property and infrastructure sectors in the second half of 2022.
That has seen reinforced bar production rolled back over the course of June at the same time as iron ore exports from Australia and Brazil are rising.
MySteel says rebar production fell 5.7% over June 16-22 to 2.88Mt, 23.7% lower than the same time last year, as mills enter maintenance to preserve profits amid falling steel prices.
The slowdown in construction activity during the lockdowns also saw mill stockpiles rise. Meanwhile, MySteel says between June 20 and 26 Australian and Brazilian ports saw off 28.6Mt of iron ore shipments, 7.4% or 2Mt up week on week and the highest level in 18 months.
Whether those miners will continue to be such smooth operators across the rest of 2022 remains to be seen.
Iron ore prices have fallen precipitously across June, dropping from US$142.45/t in early June to as low as US$109/t before recovering at the end of last week.
Singapore 62% Fe futures were paying US$124.55/t yesterday, up 3.93%. That’s a very handy price in historical terms. With uncertainties around the pace of China’s economic recovery and mill margins it remains a wait and see sitch.
“Steel inventories have been sharply higher, and any output cuts are expected to remain modest for the rest of June, providing no immediate relief to the supply glut,” analysts at S&P Global Platts said.
“Weak margins are also expected to weigh on pig iron production, as mills prioritise cost efficiency.
“Iron ore prices remained rangebound in the week ended June 24, but markets will be closely watching the pace of steel demand recovery and output cuts in the coming weeks for any clarity on price direction.”
The big mover in the junior space was CZR Resources (ASX:CZR), a Mark Creasy controlled explorer across a tenement boundary from where Rio is drilling its Mesa F deposit at its Robe River JV.
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Miners in Queensland will have to stump up extra cash to their State Government after the unicameral parliament let the royalties fly ahead of their introduction on Friday.
Producers are filthy with the move, which will introduce three new tiers on top of the 15% paid on coal prices above $150/t, including a 40c per dollar charge on coal revenues upwards of $300/t.
Spot prices of premium coking and thermal coal are almost double that at the moment.
There are concerns from steelmakers in markets such as India also that prices could go higher as miners seek to recover the added cost.
It will have an impact on what were expected to be extraordinary earnings in FY23 and calendar 2022 for the miners who report on that schedule.
The impact on BHP will be limited given it is likely to sell down some of its Queensland met coal operations and is primarily driven by iron ore earnings, while S32 and WHC operate in New South Wales.
New Hope Corp (ASX:NHC), which GS has a sell label on, is also largely geared towards NSW and its Bengalla mine while it waits for long fought approvals at the New Acland project in Queensland.
CRN is the hardest hit, boasting high quality met coal operations in Queensland.
GS analysts Paul Young and Hugo Nicolaci have lowered CRN’s 22-25 earnings per share by 10%, 20%, 33% and 46% over that four year period, with NAV down 14% from $2.74 to $2.37 a share.
But since the royalty only kicks in at higher prices, CRN’s EPS would be up more than 100% on GS estimates for FY23-24 if spot prices hold where they are.
Ironically, those royalties could help bake in the high prices which will deliver extra billions to Queensland’s bottom line.
“On balance, we view the higher royalty rates as negative for EPS and NAV, but a potential disincentive for new projects and brownfields growth, which may reduce medium to long-term supply (especially for met coal), supporting higher prices for longer in our view,” the analysts said.
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