Rio Tinto Lowers Iron Ore Price Amid Soft Demand
Mining behemoth Rio Tinto is jumping on the bandwagon and lowering its iron ore price as surging supply and weak demand from Chinese steel mills continues.
The iron ore price dropped to $89 a ton on Tuesday – its lowest level since September 2012 – as concerns about too much supply sitting at Chinese ports weighed on the minds of investors. The UK Company is following fellow iron ore miner Fortescue Metals Group by discounting the price of its low-grade iron ore.
“Demand for low quality product is plummeting,” Tim Murray, managing partner of J Capital Research said. He mentioned that demand has been falling at the same time supply has been rising.
Rio Tinto told customers on Tuesday the discount for its low-grade product would be lifted from six percent to 13 percent from July 1, leaving it to receive roughly $73 a ton.
Earlier this year, Fortescue CEO Nev Powers moved to reassure investors in Hong Kong about the risks of falling iron ore prices on the company’s profitability and the threat posed by increased mining rivals in China. Fortescue Metal’s breakeven price for iron ore is around $75 a ton, which is similar to Rio Tinto.
According to Credit Suisse head of Australian equity sales Chris Mayne, the markdown on price is a result of high supply and low demand. “The heavy discounting is partly a reflection greater supply of lower grade ore and combined with lower supply of Chinese high grade ore to blend, which has caused the discount to revert back to what was seen prior to 2010 which is 10-20 per cent discount to 61 per cent grade ore rather than close to parity that the market has been used to over the last two years.”
Global iron ore production to recover by 5.1% in 2021
Global iron ore production fell by 3% to 2.2bnt in 2020. Global production is expected to grow at a compound annual growth rate (CAGR) of 3.7% to 2,663.4Mt between 2021 to 2025. The key contributors to this grow will be Brazil (6.2%), South Africa (4.1%), Australia (3.2%) and India (2.9%). Key upcoming projects expected to commence operations include South Flank in Australia (2021), Zulti in South Africa (H2 2021), Serrote Da Laje in Brazil (H2 2021) and Gudai-Darri (2022), according to GlobalData, a leading data and analytics company.
Vinneth Bajaj, Associate Project Manager at GlobalData, comments: “Declines from Brazil and India were major contributors to the reduced output in 2020. Combined production from these two countries fell from a collective 638.2Mt in 2019 to an estimated 591.1Mt in 2020. The reduced output from the iron ore giant, Vale, was the key factor behind Brazil’s reduced output, while delays in the auctioning of mines in Odisha affected India’s output in 2020.
“Miners in Australia were relatively unaffected by COVID-19 due to effective measures adopted by the Australian Government, while a speedy recovery in China led to a significant 10.4% increase in the country’s iron ore output.”
Looking ahead, the global iron ore production is expected to increase by 111.3Mt to 2,302.5Mt in 2021. Rio Tinto is expected to produce up to 340Mt of iron ore, while BHP has released production guidance of 245–255Mt, supported by the start of the Samarco project in December, which is expected to produce between 1–2Mt.The company has retained its guidance for Australian mines at 276–286Mt on a 100% basis, due to scheduled maintenance work at its ore handling plant and tie-in activity at the Area C mine and South-Flank mine.
Bajaj added: “The remaining companies are expected to produce more than 600Mt of iron ore, including FMG, whose production is expected to range between 175–180Mt supported by its Eliwana mine that commenced operations in late December 2020, and Anglo American, which is expecting to produce between 64–67Mt. Vale is expected to resume 40Mt of its production capacity, taking its overall production capacity to 350Mt in 2021, with production guidance of 315-335Mt.”