Jesse Riseborough and Juan Pablo Spinetto London
BRAZIL’S Vale, the largest exporter of steel-making iron ore, has usurped its two nearest rivals to become the lowest-cost producer as a slump in the price of oil cuts shipping costs, according to Sanford C Bernstein.
“In the last few months we have seen the price for bunker fuel collapse in lock-step with the decline in the global oil price and with it a reordering of the cost position of the global iron-ore industry has taken place,” Paul Gait, an analyst at Bernstein in London, wrote this week in a report.
Rio Tinto Group and BHP Billiton are the biggest exporters after Vale. Their Australian mining hubs have traditionally held a cost advantage over Vale due to their proximity to China.
The three producers collectively control about 60 percent of global exports and have been pumping billions of dollars into expanding output, squeezing higher-cost producers in an already over-supplied market. Oil slumped almost 50 percent last year, the most since the 2008 financial crisis, amid a supply glut, mirroring a 47 percent collapse in iron ore.
Iron ore with 62 percent content at the Chinese port of Qingdao dropped 1.2 percent to $70.30 (R807.89) a dry ton on Monday, according to Metal Bulletin, trading close to the lowest in more than five years.
Due to a slide in fuel prices Vale was shipping iron ore to China for about $6 a ton cheaper than Australian exports, Bernstein’s Gait said. That includes the cost of mining.
Advantage
“Over the last five years it has cost an average of $23 a ton to ship iron ore from Brazil to China while it has cost only $9 a ton to ship it from Australia,” he said. “In a world where freight is free and distance to market not an issue, then Brazil is actually at a significant competitive advantage over Australia.”
Representatives for BHP and Rio Tinto were not able to comment. Vale’s press office did not reply to an e-mail seeking comment on the note.
The cost of freight for capesize vessels from Brazil to China has dropped below $10 a wet ton for the first time since January 2009, compared with about $5 a ton for Australia to China, Macquarie Group analysts said in a note on Friday. Vale could now ship a ton of iron ore to China cheaper than BHP “for the first time in many years”, and was close to challenging Rio as the lowest-cost supplier, Macquarie said.
Earnings boost
Vale may generate $680 million in additional earnings before interest, taxes, depreciation and amortisation this year and $1.5 billion in 2016 provided the lower oil price remains, Andreas Bokkenheuser, an equity analyst at UBS Group, said in a note to clients last week.
Vale expects to produce 340 million tons of iron ore in 2015 including third-party purchases after boosting output 8.1 percent in the first nine months of last year to a record 236.2 million tons.
BHP last year said it wanted to cut production costs to less than $20 a ton from about $25 a ton at present, excluding freight and royalty costs. That compares with Rio Tinto’s average cost of $20.40 a ton in the first half of last year.
Last year’s iron-ore price slump prompted Goldman Sachs to declare the “end of the Iron Age” after a China-led demand spike over the past decade brought record profits for producers.
On the JSE, BHP’s share price jumped 1.77 percent to close at R236.91. – Bloomberg