Dineo Faku
ALTHOUGH most commodity prices were weak, large-scale producers’ margins remained high, but profitability would continue to be helped by increasing global production levels, said Afriforesight’s monthly commodity update released last month.
The report forecast that in the coming year, the profitability for the top players in iron ore and gold industry was “very good” while diamonds profitability was “excellent”, however platinum group metals were “okay” but were still recovering from effects of the five-month strike.
It said volumes and high margins were expected to strengthen profitability in some industries in the mining sector for the remainder of the year.
Afriforesight’s chief economist Jacques Botha, one of the author’s of the report, said this was against the backdrop of the ending of the Chinese story for commodities. The economy of that country is set to grow at about 7.2 percent this year from the official target of 7.5 percent and is forecast to grow lower at 6.7 percent next year. “This is bad news for developing countries that rely on China to consume mined commodities,” he said.
Kobus Lamprecht, Afriforesight’s chief commodity economist, explained that the outlook for the iron ore industry was very good as the average gross profit margins for major iron ore producers were about 50 percent at this month’s prices of $81 (R892) a ton.
“Iron ore margins should continue declining to a still-attractive 35 percent by the end of next year,” he said.
Production volumes from low-cost producers including Anglo American, subsidiary, Kumba Iron Ore, were expected to rise strongly on the back of the high margins, Lamprecht said in the report.
Iron ore is used mainly for the production of steel. China produces about 50 percent of the world’s steel and imports almost two-thirds of all exported iron ore.
The problem with iron ore was oversupply as low-cost producers raised production at a faster pace, said Lamprecht.
Chinese producers are grappling with high costs due to low grades, deep ore and expensive overland transport.
In October with iron ore prices at $81 a ton, about 70 percent of Chinese mines operated at a loss.
“We expect about 30 percent [of mines] to close by end-2015 [the rest are either state-owned or steelmaker-owned with a few able to up their efficiency],” said Lamprecht.
Local coal producers were still well positioned for export growth despite strong lower cost competition, said the report. The country’s coal exporters should have difficulty regaining European market share given the proximity advantage for Russia, the US and Colombia.
The average gross profit margins for major gold producers were at about 40 percent at October prices, and were expected to decline to 35 percent by the end of next year.