Despite the grim situation, Rio Tinto, BHP Billiton, and Vale—collectively known as the “Big Three” mining companies—have chosen not to cut production but instead have adopted their “time-tested tactic” of increasing output to outcompete high-cost mines.
On December 20, Zhang Lei, Vice President of Metals and Mining at Morgan Stanley China, stated at the “My Steel” annual conference that in 2014, low-cost mines—primarily in Australia—expanded their production capacity, completely reversing the supply-demand situation for iron ore and accelerating the pace of production cuts at high-cost mines. It is expected that in the future, domestic high-cost miners will face large-scale losses.
She said that, based on the original expectations, steel production has been revised downward due to the overall slowdown in economic growth. As a result, iron ore is expected to remain in a state of long-term oversupply, with prices fluctuating within a relatively narrow range—roughly between $75 and $80 per ton.
Wang Jianhua, chief editor of “My Steel” website, analyzed and pointed out that, in this year’s growth of iron ore imports, if the volumes imported from Brazil and Australia are excluded, imports of non-mainstream ores have declined by 11.3%. If the next two months are taken into account, and assuming iron ore prices fall below $100 per ton, the decline in non-mainstream ore imports will be even more pronounced. It is estimated that in 2014, the reduction in imports of non-mainstream ores will amount to roughly 30 million tons.
Since 2005, global iron ore production capacity has been steadily increasing. Although it experienced a significant decline during the 2008 financial crisis, starting in 2009, capacity entered a phase of rapid expansion. Among them, the Australian miner FMG, backed by Chinese capital, embarked on a path of rapid growth and has now become the world’s fourth-largest iron ore supplier. From January to September 2014, iron ore production rose by nearly 80% compared to the same period last year.
Wang Xiangyu, a futures analyst at Meiliya Futures, said that Vale’s production and sales in the first half of 2014 reached 141 million tons and 117 million tons, respectively. The S11D project in Carajás is expected to begin shipments in 2016 and achieve a capacity of 90 million tons by 2018. As a result, Vale’s production capacity will see a rapid increase in 2015.
He further stated that Rio Tinto’s current production capacity is 230 million tons, and by the end of this year, its capacity will reach 290 million tons—a 60-million-ton increase. BHP Billiton’s current capacity stands at 200 million tons, rising to 300 million tons by 2015. FMG’s capacity will reach 250 million tons in 2015, after which there will be no major changes. Overall estimates indicate that by 2015, the combined capacity expansion of the world’s top four iron ore producers will amount to approximately 1.4 billion tons.
Amid weak demand, several major iron ore suppliers have actually increased their production. In the first half of this year, Rio Tinto’s iron ore shipments rose by 20% year-on-year; and Brazil’s Vale also recorded its highest-ever second-quarter production for the same period.
Australia is the world’s largest exporter of iron ore. Over the past 12 years, BHP Billiton of Australia has cumulatively shipped 1 billion tons of iron ore to China. Recently, BHP Billiton’s CEO Andrew Mackenzie publicly stated that BHP has always been committed to maintaining a close partnership with China, and in the future will continue to place great importance on the Chinese market while enhancing efficiency and reducing iron ore costs by 20% over the next five years.
Recently, Vale and Qingdao Port Group signed the “Agreement on Establishing Friendly Port Relations between Qingdao Port and Madeira Port” in Rio de Janeiro, Brazil. This agreement aims to enhance cooperation between Qingdao Port and Madeira Port in increasing the volume of iron ore trade, jointly establishing a convenient and efficient logistics channel for Brazilian iron ore exports to China, and collaboratively setting up the “Vale-Qingdao Port Iron Ore Distribution Center.”
Industry insiders say that this proposed iron ore distribution center is akin to a “virtual mine.” Vale will first use 400,000-tonnage ore carriers to ship large quantities of iron ore in bulk to port for storage, and then sell it locally in smaller, retail-like quantities. This approach not only enhances the timeliness of supply and avoids inventory buildup that could disrupt its own production, but also helps reduce shipping costs from Brazil to Asia. With the distribution center and its own fleet of transport vessels, Vale will be better positioned to compete with Australian iron ore companies that are closer to Asian customers.
However, this plan had previously faced resistance from some domestic steel mills, which were concerned that after Vale established an iron ore distribution center, the company would further tighten its grip on spot market prices. Yet, according to sources familiar with the matter who spoke to our reporter, the likelihood of the plan going ahead is now very high, and Vale is currently in talks with several northern ports—including Qingdao Port—about setting up distribution centers.
Just a few years ago, the three major mining companies adopted a very tough stance, threatening to cut off supplies unless Chinese steel mills accepted higher iron ore prices and a shift in pricing mechanisms. Now, as the market has shifted toward a buyer’s market, these three major mining companies are forced to rack their brains to compete for the Chinese market and reduce costs.