Iron ore prices climb as steel prices dip

The Big Four

Four companies dominate global iron ore production, together controlling over 70% of iron ore exports: the Anglo-Australian BHP, the Brazilian multinational Vale SA, the London-headquartered Rio Tinto, and the Australia-based Fortescue Metals Group. Company data indicate that the extraction costs for the big four range from $20.80 per metric ton for Rio Tinto to $51 for Fortescue. Smaller companies typically shoulder higher costs, anywhere from $60 to $120 per metric ton, according to some estimates. 

It shouldn’t come as a shock that the producers with the lowest operating costs are in the best position to grab market share. Nor is it surprising that some smaller higher-cost iron ore mines have closed in recent years—including ones in Canada, China, and Africa.

The same thing is happening in Australia, where a report from Fitch Solutions, an economic advisory firm, predicted that Australian iron ore production will experience only minimal growth from 2020 to 2029, despite major new mines—operated by three of the big four—coming online next year in the Pilbara region of Western Australia.

The projected slow growth of an average of 0.7 percent per year—a 92% decline over the previous 10-year period—was blamed on closed facilities by smaller miners. “Majors continue to decrease costs and increase production in the longer term,” the Fitch Solutions report said. “We expect majors Rio Tinto, BHP and, Fortescue Metals Group to drive Australian iron ore production.”

With mineral prices climbing, and in contrast to the anemic performance of the steelmakers, Rio Tinto revealed its highest profits in eight years on February 26, with underlying earnings rising 18% to $10.3 billion in 2019. Fortescue Metals earned $3.2 billion in its fiscal year 2019, 263% above its 2018 levels. BHP recently reported its best results in five years, with profits increasing to $5.19 billion for the six months ending December 31, a 29% increase from a year earlier and its strongest result since 2015. 

Vale SA, which is experiencing ongoing legal and operational problems, reported a $1.56 billion net loss in the fourth quarter of 2019, along with a 22.4% fall in fourth-quarter iron ore production compared to the same period last year. But at least one Wall Street analyst predicted the company’s return to profitability by the end of the year.

Of course, the coronavirus outbreak is a situational factor that could dim the currently bright prospects for the world’s major iron ore miners. Rio Tinto’s management, despite the company’s recent positive results, cautioned that “the next six months could bring some challenges.” And BHP officials indicated the disease could throw a monkey wrench into iron ore demand projections for 2020 if the fallout extended beyond March. 

That’s a pretty short time horizon—and prospects for controlling the pandemic appear to be getting worse, not better.