Rio Tinto Group and BHP Billiton, two of the world’s biggest iron ore producers, are benefiting as falling iron ore prices put pressure on smaller rivals in China to shut down.
The price of iron ore has plunged 44 percent from its peak in February last year amid record output. That is hurting mining companies in China, where between 20 percent and 30 percent of mines have closed, according to the China Metallurgical Mining Enterprise Association.
The closures are helping Rio Tinto and BHP Billiton which, along with Brazil’s Vale, already control about two-thirds of global seaborne supply from their low-cost mines.
Iron ore worth about $40 billion (R426bn) a year is mined in China. “Many smaller mines in China have stopped production due to the falling prices,” said Sarah Wang, a Shanghai-based analyst with Masterlink Securities. “It’s the right time for BHP and Rio to seize the opportunity to boost their market share.”
BHP Billiton, the world’s biggest mining company, last month also flagged the closure of some Chinese ore mines.
“Most of them are smaller ones, while the bigger ones are also starting to be affected,” Liu Xiaoliang, the association’s general secretary, said. “Almost 70 percent of the ore-processing companies have also closed.”
Iron ore, which entered a bear market in March, last week hit a 21-month low of $89 a dry ton.
The share price decline for the top producers is less than half the percentage fall in the ore price. BHP Billiton, the world’s third-largest iron producer, lost about 8 percent of its market value from iron ore’s price peak on February 20 last year, to the June 16 low.
The comparable Australian shares of Rio Tinto, the second biggest, declined 16 percent.
Shares in Vale, the top iron producer, are down about 27 percent.
About 80 percent of China’s mines have operating costs of between $80 and $90 a ton, according to Shanghai-based consulting firm Mysteel.com. That compares with $44 for Rio Tinto, $53 for BHP Billiton, $68 for Vale and $77 for Australian producer Fortescue Metals Group, according to estimates from UBS.
“They are all superstars still,” said Tom Price, a commodity analyst for UBS.
“Chinese production is under pressure right now.”
He estimated that China would produce 370 million tons of seaborne grade equivalent ore this year and that more than half of its iron ore industry was under threat.
The iron content in mines in China is typically half or less than that found in ore from Australia and Brazil.
Deutsche Bank analysts led by Paul Young said in a report last week: “We expect an extra 250 million tons to be displaced and for high-cost Chinese domestic mines to permanently close.”
To be sure, increased demand from Chinese steel mills and a rebound in prices may slow the shutdown of domestic ore mines. Citigroup expects prices to stabilise in the second half as supply levels off.
Mines with as much as 100 million tons of output may close this year, according to Australia & New Zealand Banking Group. “The majors are probably thinking they are well placed to take care of that market,” James Wilson, an analyst at Morgans Financial, said. - Bloomberg