PERTH, March 11 (Reuters) - One
question that skulks like an elephant in a room where the iron ore industry has
gathered is who has benefited the most from bulging global supplies.
The Anglo-Australian pair of BHP
Billiton and Rio Tinto are happy to tell you how they have successfully ramped
up output at costs low enough to still rake in profits.
That was very much their message at
this week's Global Iron Ore & Steel Forecast conference in the Western Australia capital city.
The smaller miners suffering from
the collapse in Asian spot iron ore prices are only too willing to speak of
their battle to survive amid what they see as the destruction of the value of
an industry that is Australia's largest export earner.
The price of iron ore .IO62-CNI=SI
hit its lowest on record on Tuesday, at $58 a tonne, with this year's decline
of 19 percent compounding last year's slump of 47 percent.
Steel industry officials in China, the destination of two-thirds
of the world's seaborne iron ore, will also tell you how their industry suffers
from overcapacity, poor profits and the economy's shift to consumption-led
growth.
So all this begs the question, who
is the winner of the decisions by the major iron ore miners, and some
aggressive juniors, to build capacity beyond even the most heroic assumptions
of global steel demand?
The big three miners, Brazil's
Vale, BHP Billiton and Rio Tinto, along with number four, Fortescue Metals
Group , are the prime drivers behind the roughly 330 million tonnes of iron ore
capacity that has come on line, or is scheduled to start in the next few years.
To put this figure in perspective,
China's iron ore imports stood at 934 million tonnes last year, up 13.9 percent
from the previous year, and about double what they were in 2007.
REALITY DIFFERS FROM FORECASTS
The investment decisions for the
bulk of this new capacity were taken around 2011, when iron ore prices hit a
record above $190 a tonne and optimism abounded that Chinese import demand
would rise to around 1.5 billion tonnes sometime around the middle of next
decade.
The reality has turned out somewhat
differently, with the China Iron and Steel Association (CISA)
believing the nation's steel output has peaked at 823 million tonnes last year.
Li Xinchuang, the association's
deputy secretary general, told the conference that steel demand in China, which accounts for about half
the global total, will gradually decline in coming years.
Assuming his forecast is accurate,
the good news for iron ore is that he does not foresee a rapid decline from
peak steel, rather a more gentle easing.
But this implies the iron ore
industry's only hope of being able to sell additional output comes from
displacing high-cost producers.
To some extent, the big three plus
Fortescue have had some success, with a rapid fall in Chinese imports from
countries besides Australia and Brazil.
Smaller producers in Australia have also been forced from the market
and more could follow if prices remain depressed.
The main game for the major,
low-cost miners is to force the curtailment of Chinese domestic production, and
this is also happening to some extent.
Rio Tinto iron ore boss Andrew
Harding told the conference 125 million tonnes of high-cost iron ore exited the
market in 2014, of which 85 million tonnes were in China.
He expects a further 85 million
tonnes may be at risk of being idled, but even that would not be enough to
offset the wave of new supply.
Of course, Rio Tinto and BHP
Billiton are more optimistic on steel output in China than CISA or Chinese consultancy
MySteel, as well as being bullish on steel consumption outsideChina over the next 15 years.
Even if the miners are correct, the
market is likely to remain in strong oversupply for several years, waiting for
both demand to rise and some supply to decline as the mines reach end of life
and little is done to replenish depleting reserves.
IRON ORE'S ZERO-SUM GAME
And this brings one back to the
question of who are the winners?
Not investors in BHP Billiton and
Rio Tinto, with the Australia-listed shares of both now a third below 2011
levels.
Not the Chinese steel mills,
although their woes are largely self-inflicted as well, having built 1.2
billion tonnes of capacity, about 40 percent of which is now idled.
How about iron ore traders? They
will have benefited from the rapid growth in market volumes and the increasing
use of paper derivatives, such as Singapore Exchange's swaps.
But the extended period of low
prices has most probably eaten away at their margins as well, making iron ore
at best a marginal business.
Australian state and federal
governments are also likely to be less than pleased, given their royalties are
priced-based, meaning lower prices outweigh higher volumes.
Australian workers benefited in the
construction phase, but with no more work in the pipeline, many will struggle
for jobs.
Steel end users are also not
certain beneficiaries, with Chinese property developers struggling, again
largely because of the decision to over-invest.
The main beneficiaries of the iron
ore glut have to be makers of steel-intensive products, such as cars and white
goods, but competition in their industries may not allow them to build margins
on the back of lower input costs.
Perhaps the ultimate beneficiaries
are borrowers, as lower steel prices feed through into several products,
keeping inflation low to non-existent in many countries, and letting central
banks keep interest rates at historic lows.