Letters of the Week

Iron ore miners’ margin sensitivity. Embracing the concept of instant gratification. Analysing China.

Margin sensitivity
One key aspect that was not addressed sufficiently in the article Iron ore’s harder times is the sensitivity iron ore companies have to price as a result of their cost position. If we say the price is 100 and the cost position 50, then a 10% price reduction affects profit by 20% (margin drops from 50 to 40). However, if the cost position is, say, 80, then the same price reduction halves profit. The large miners, BHP and Rio, have large, world-class mines with high grades and low cost. As iron ore prices rose strongly in the last decade, many new mining companies sprung up by picking up the crumbs in the Pilbara. They are now the ones who are hurting first and most.

– T Girgens

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