Bulk Buys: Iron ore ‘a pure demand story’ as supply struggles to grow
Link copied to
One of Australia’s emerging iron ore juniors says iron ore prices will be a “pure demand story” going forward as the majors struggle to ramp up supply of the steelmaking material.
Fenix Resources (ASX:FEX) boss Rob Brierley has enjoyed the benefit of strong iron ore prices since the well-timed opening of its Iron Ridge mine around the start of 2021.
With spot prices hovering for several days around seven-month lows at ~US$110/t, the market is facing questions about whether Chinese stimulus will salvage the steel sector or if there is another leg lower.
Dalian iron ore fell 4.9% yesterday to US$105.04/t for the September contract, with Singapore futures dropping 3.11% to US$106.60/t, its lowest close since December.
Fenix sold 344,000wmt of iron ore from its Iron Ridge mine near Geraldton in WA in the June quarter at an average price of US$121.90/t FOB (equivalent to US$154.05/t in China), generating $15m in net cash flow and boosting its bank balance from $85.6m to $101.9m ahead of a likely second straight end of year dividend.
Brierley, a former mining research analyst, says the company has confidence in the price going forward because majors BHP (ASX:BHP), Rio Tinto (ASX:RIO), Fortescue (ASX:FMG) and Vale have struggled to grow production in recent years.
“The price has weakened a little bit, we all know that and we all see that, there’s so many moving parts (with) China COVID closures, Russia-Ukraine,” he said.
“All I can tell you is that where we do get some confidence is that on the supply side of the equation there’s been very little reaction from the majors, so they’ve got pretty consistent production, without it being incrementally much higher.
“That gives you some certainty as far as supply goes, so it becomes a pure demand story and you know … as I mentioned before, there’s a lot of moving parts on that demand story at the moment.
“We feel very confident in the long term future demand for iron ore and the requirement for steel, particularly in the use for infrastructure rebuilds, etc, in the US, in China, in Southeast Asia, and potentially even Europe.”
Iron ore prices are hugely reliant on demand from China given its centrifugal role in the steel supply chain.
At over 1Bt of production in the last two years, almost 60% of the world’s crude steel is now produced in China.
Early production from January to May surprised to the upside, raising fears China’s politburo would curb steel output to maintain its plan to ensure overall output at steel factories this year is lower than in 2021.
In the end the industry has taken the initiative itself after China’s hard stance on lockdowns stymied investment in property and infrastructure.
That has sent mills into maintenance mode, reducing ultimate demand for iron ore, which has slid more than 30% from a 2022 high of ~US$163/t in March following Russia’s invasion of Ukraine.
According to MySteel, blast furnace capacity use has dropped for three straight weeks to 85.71% as mills facing falling rebar and hot rolled coil prices sunk to US$70/t losses as of the end of June.
Baowu-owned Baoshan Iron and Steel dropped its HRC prices by US$29.7/t again for August, the Chinese consultancy reported.
At the same time Australian and Brazilian iron ore shipments appear to have responded, sagging to a month low last week while MySteel chief analyst Wang Jianhua is optimistic steel prices could find a bottom this month.
If that is the case Fenix is likely to remain stable for a few reasons. Firstly with a resource grade of 63.9% – much of it in valuable lump form – it boasts a product that draws premiums over the 62% benchmark.
Secondly, hedges have ensured much of its cost base is covered by iron ore sales above prevailing market prices.
Lastly, the company says its purchase last month of Newhaul, its haulage provider and largest contractor, will lop ~$10-20/t off its $91.53/wmt cash cost last quarter.
Junior miners sheltered from lower prices will be those who can constrain costs (the Pilbara majors for instance ship at between US$15-21/t, supporting massive margins even in down periods).
“It’s not a simple equation,” Brierley said. “You saw with this quarter our costs were up, nearly $10 a tonne on the previous quarter and that was driven really by diesel prices, mainly.
“The prices for diesel have averaged over $2, I think it’s $2.05 per litre. Our feasibility study used $1.30, so we’ve had to absorb that cost.
“By the way, we’re not alone. I mean, every single producer whether they’re in iron, whether they’re in other commodities, even manufacturing have had to absorb that cost rise.
“All things being equal … we do expect that step change movement down in our C1 costs solely off the benefit of the Fenix-Newhaul transaction.”
Scroll or swipe to reveal table. Click headings to sort.
Thermal coal prices crept back towards record highs yesterday, with Newcastle thermal coal futures rising 1.7% to US$419/t.
A few things are going on, mainly on the supply side.
Even leaving Russia out of the equation, heavy rain in the Hunter Valley has caused disruptions to port and rail operations in New South Wales.
LNG prices also remain stubbornly high, supporting higher prices for energy coal. A labour dispute and shutdown at Shell’s Prelude floating LNG facility in WA will do little to help.
Most big coal stocks have more than doubled in share price over the past year.
Even at lower prices though, some analysts say Australia’s big coal miners would be materially undervalued.
OK some of these Aussie thermal name valuations just make no sense. Mkt is just so offsides. Prepare for some smooth brain workings to figure out why. Example de jour: Whitehaven $WHC.AX
— Jeremy Raper (@puppyeh1) July 11, 2022
We’re pushing record levels from late and early May again, with thermal coal prices so overcharged they’re picking up a highly irregular US$150+ premium to metallurgical coal, which is typically viewed as a higher quality product.
Scroll or swipe to reveal table. Click headings to sort.