Monday, July 30, 2012

Short Australia: Iron ore going down, down, down (VALE; BHP; RIO)

Ten days ago China Daily was reporting: "Iron ore inventories in China reached a record high of about 100 million metric tons due to shrinking downstream demand, but major global suppliers are still increasing output." Last week the world's largest iron miner reported: "Vale Counting on China Rebound as Profit Sinks"
And today, FT Alphaville:
We related last week a forecast from Nomura that iron ore was going to keep falling, and probably more steeply, as it tends to follow Shanghai rebar futures (the most-traded steel futures) and those have plummeted of late. It looks like spot iron ore prices are indeed catching up (or down) with rebar, and that’s taken iron ore below the critical $120/tonne mark.

Why is $120 important? Because of the cost curve. This comes up a lot in the world of iron ore, so it might be worth revisiting what that means.

The “cost  curve” just refers to the price level at which each producer can and will continue to produce. Above their price level they’ll profit and below it, they’ll tend to cut or stop producing. Of course this is a very broad generalisation and lots of things can get in the way but that’s believed to be the general structure of the market today....MUCH MORE
The Australia ref. was to the Pilbara region where Rio Tinto and BHP Billiton are extracting 430 million tonnes a year.