Australia’s big three miners look to tighten their iron grip – by Jamie Smyth (Financial Times – July 8, 2014)

Port Hedland – The man who made a US$10bn bet on the global iron ore market is predicting Australia’s big three miners will tighten their grip on the global industry over the next few years as higher cost producers fall victim to lower iron ore prices.

Andrew “Twiggy” Forrest, founder and chairman of Fortescue Metals Group, says the sharp fall in iron ore prices since the start of the year is causing some smaller Australian producers and overseas competitors to exit the industry.

“Because you have incredibly low operating costs with the big Australian producers we are seeing more substitution take place from China and India as competitors switch off production,” says Mr Forrest, who owns one-third of Fortescue shares.

“The wholesale shutting down of iron ore production industries basically happens in other countries. The Pilbara [in Western Australia] has always been historically the big player.”

Australia’s big three miners BHP Billiton, Rio Tinto and Fortescue have spent tens of billions of dollars over the past decade expanding mines, railways and ports in the Pilbara to cash in on surging demand from China.

They have enjoyed a stellar run with iron ore prices hitting a peak of US$191 per tonne in 2011, prompting Australian companies to ramp up supply to 661m tonnes in 2014 – equivalent to about one-third of global supply.

But for the first time in a decade supply of the reddish brown ore, the key ingredient in making steel, looks set to outstrip demand over a sustained period. Investor concerns about a cooling Chinese economy and a crackdown by Beijing on commodity financing are adding to market volatility.

Prices have fallen 30 per cent since the start of the year to about $95 a tonne, prompting the big miners and analysts to predict a restructuring of the global iron ore industry.

“These low prices are seeing a supply response, not in Australia but in the high-cost areas of China,” says Glyn Lawcock, analyst with UBS. “Chinese domestic iron ore production is probably now curtailed by upwards of 100m tonnes per annum.”

China produces about 350m tonnes of iron ore a year at a large number of small mines, which have cost of production of $90 per tonne or more. Mexico, Iran, Malaysia and several other countries are also cutting production, says Mr Lawcock.

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