Clyde Russell is a Reuters columnist. The views expressed are his own.
LAUNCESTON, Australia – (Reuters) – There was maybe more than a touch of hubris in Rio Tinto boss Sam Walsh’s recent comment that it’s time for other iron ore producers to “really feel the consequences” of the current low price.
The chief executive of the world’s No.2 iron ore miner was speaking after his company’s first-half results last month, basically delivering the message that Rio Tinto is going to keep going full-steam ahead on its iron ore expansion plans.
Walsh, along with the bosses of top iron ore miner Vale and No.3 BHP Billiton, is betting that their low-cost, high volume model will force smaller competitors to the wall, leaving them the undisputed kings.
Perhaps he should have a word or two with the chief executives of coal miners, which, oddly enough, includes himself given Rio Tinto’s extensive coal assets.
When the price of both thermal and coking coal started to decline in mid-2011, the word from the industry was that this wasn’t too big a surprise, but no need to worry as Chinese demand will ensure prices don’t fall too far, and all the new capacity brought on and planned will be profitable.
With spot thermal coal at Australia’s Newcastle port, an Asian benchmark, dropping from its post-2008 recession peak of $136.30 a tonne in January 2011 to a low of $110.28 that year, it’s easy to see why the concern was muted.
Fast forward to the middle of 2013 and the story had changed slightly, to one of Chinese demand is still there, but now there is global oversupply because of shale gas displacing coal in power generation in the United States.
By September 2013, Newcastle coal was down to $76.70 a tonne and the industry was saying it couldn’t fall much further as this would cause loss-making mines to shut down.
But fall further it did, dropping to $67.89 a tonne by July 25 this year, and it was still below $70 a tonne as of last week.
The coal industry is now facing the brutal reality that low prices are here to stay, irrespective of how much demand from top importers China and India may increase.
This is simply because new mine capacity ran ahead of demand growth, and miners chose to boost supply even further in the face of lower prices in a bid to lower unit costs.
The net effect was more output, lower prices and a struggling industry.
Even if coal demand does rise to exceed existing supply, prices can only rise so far before the supply that has left the market, such as that from North America, returns.
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