Squeezed at the margins
Mount Gibson's confession that customers have asked to delay shipments of iron ore has huge implications not just for iron ore producers but all mid-tier miners in particular.
When mid-tier iron ore producer Mount Gibson Iron announced on Thursday that its customers were asking it to delay shipments because of the credit crisis, the slowing global economy and a build-up in Chinese iron ore stockpiles it triggered a meltdown in the prices of the iron ore hopefuls.
Mount Gibson itself lost a third of its value in a day and a half. Fortescue Mining fared just as badly. Its shares have more than halved in value in the past three weeks. Murchison Metals has had the same experience. Sinosteel must by now be wondering about the timing and value of its protracted, but successful $1.2 billion takeover of Midwest Corp. There are a bunch of China Inc investors in West Australian iron ore hopefuls who'll be licking some deep wounds.
There are a number of ways to explain the request from Mount Gibson's customers, which are mainly trading houses on-selling to China's smaller steel mills. The disconcerting aspect of what has happened to Mount Gibson, however, is that the issues highlighted by its experience aren't confined to the iron ore sector.
The Chinese economy is slowing. A combination of the post-Olympics slowdown, the initial impact of the rapid deceleration in global activity and the drying up of credit is pushing it down from the double-digit growth rates it has enjoyed to something around the 8 to 9 per cent level.
While Mount Gibson's ore is high-quality haematite, its ultimate customers are the small mills – the marginal producers with the highest cost bases.
The slowing Chinese economy is reducing demand for their product and in turn reducing demand for the output of the smaller iron ore producers. India, which traditionally has been a major supplier through the spot market to those mills, was impacted quite early and now the ripples are flowing more widely.
The problems being confronted by the marginal steel producers are being transmitted directly to the marginal iron ore producers – the newer, smaller producers with the higher costs bases like Mount Gibson and Fortescue.
China's stockpiles of iron ore have mounted as a result of the slowdown. And perhaps it was also a strategic decision in an effort to take the heat out of what had previously been a very hot spot price and set the scene for the next round of annual negotiations over the benchmark prices.
BHP Billiton, Rio Tinto and Vale, with their vast low-cost resources, haven't been impacted, yet, but their share prices have. Rio Tinto, which has sold more than 10 per cent of the 15 per cent of production it plans to sell into the spot market this year, might lose some of its margin because of the collapse in the spot price, but doesn't appear to be concerned about its ability to shift volume.
The slowdown in China won't, of course, just affect iron ore volumes and prices. It will flow through to all bulk commodities. Where in recent years the big iron ore and coal producers have had – and have exploited – enormous influence over the customers, next year's negotiations could see a much more balanced discussion.
If China's growth comes in below expectations, the big steel mills could hold the upper hand, and – given the tension in the relationships with BHP, Rio and Vale – could be quite keen to exploit it.
Given the massive increases in volumes and prices the big resource groups have experienced in recent years, a pause in the price-paths for commodities and lower-than-expected volume growth isn't going to damage the big miners materially.
From their perspective, if the slowdown and the lack of credit availability puts pressure on marginal producers – magnetite producers would be feeling queasy at present – and delays the entry of new projects and producers to the markets, it might even strengthen their position.
The Chinese have been encouraging and helping to underwrite the development of new higher-cost and lower-quality projects to try to weaken the mining oligopolies. In the current financial and economic environment they won't be quite as willing or able to continue to do that. Which, in the longer term, can only be good for the oligopolies.
Mount Gibson itself lost a third of its value in a day and a half. Fortescue Mining fared just as badly. Its shares have more than halved in value in the past three weeks. Murchison Metals has had the same experience. Sinosteel must by now be wondering about the timing and value of its protracted, but successful $1.2 billion takeover of Midwest Corp. There are a bunch of China Inc investors in West Australian iron ore hopefuls who'll be licking some deep wounds.
There are a number of ways to explain the request from Mount Gibson's customers, which are mainly trading houses on-selling to China's smaller steel mills. The disconcerting aspect of what has happened to Mount Gibson, however, is that the issues highlighted by its experience aren't confined to the iron ore sector.
The Chinese economy is slowing. A combination of the post-Olympics slowdown, the initial impact of the rapid deceleration in global activity and the drying up of credit is pushing it down from the double-digit growth rates it has enjoyed to something around the 8 to 9 per cent level.
While Mount Gibson's ore is high-quality haematite, its ultimate customers are the small mills – the marginal producers with the highest cost bases.
The slowing Chinese economy is reducing demand for their product and in turn reducing demand for the output of the smaller iron ore producers. India, which traditionally has been a major supplier through the spot market to those mills, was impacted quite early and now the ripples are flowing more widely.
The problems being confronted by the marginal steel producers are being transmitted directly to the marginal iron ore producers – the newer, smaller producers with the higher costs bases like Mount Gibson and Fortescue.
China's stockpiles of iron ore have mounted as a result of the slowdown. And perhaps it was also a strategic decision in an effort to take the heat out of what had previously been a very hot spot price and set the scene for the next round of annual negotiations over the benchmark prices.
BHP Billiton, Rio Tinto and Vale, with their vast low-cost resources, haven't been impacted, yet, but their share prices have. Rio Tinto, which has sold more than 10 per cent of the 15 per cent of production it plans to sell into the spot market this year, might lose some of its margin because of the collapse in the spot price, but doesn't appear to be concerned about its ability to shift volume.
The slowdown in China won't, of course, just affect iron ore volumes and prices. It will flow through to all bulk commodities. Where in recent years the big iron ore and coal producers have had – and have exploited – enormous influence over the customers, next year's negotiations could see a much more balanced discussion.
If China's growth comes in below expectations, the big steel mills could hold the upper hand, and – given the tension in the relationships with BHP, Rio and Vale – could be quite keen to exploit it.
Given the massive increases in volumes and prices the big resource groups have experienced in recent years, a pause in the price-paths for commodities and lower-than-expected volume growth isn't going to damage the big miners materially.
From their perspective, if the slowdown and the lack of credit availability puts pressure on marginal producers – magnetite producers would be feeling queasy at present – and delays the entry of new projects and producers to the markets, it might even strengthen their position.
The Chinese have been encouraging and helping to underwrite the development of new higher-cost and lower-quality projects to try to weaken the mining oligopolies. In the current financial and economic environment they won't be quite as willing or able to continue to do that. Which, in the longer term, can only be good for the oligopolies.
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