Of far greater consequence to Rio Tinto, BHP Billiton and Australia than Andrew Forrest’s complaints about their volume and cost-driven iron ore strategies is what the “other” major seaborne producer does in response to the crash in iron ore prices.
They might be encouraged by the commentary that accompanied Vale’s first-quarter results overnight.
The Brazilian group is the larger of the three major seaborne iron ore producers and is in the midst of an ambitious and expensive ($US17 billion) program to increase its production by 40 per cent, to almost 460 million tonnes a year from last year’s 327 million tonnes.
As with all the other producers, Vale is slashing costs to try to dampen the impact of the dive in iron ore prices and was able to proclaim that, for the first time in its history, cash costs were less than $US20 a tonne. A significant component of the $US13 a tonne reduction in cash costs was a 20 per cent, or $US4.50 a tonne, fall in freight costs.
Vale has traditionally been competitive with Rio (RIO) and BHP (BHP) in production costs and its ore is generally of higher quality. Its disadvantage has been distance from China and the impact that freight costs have had on its landed costs. There are parts of its sprawling Carajas system, however, where the cash costs of producing its ore and moving it to its departure port have been, even before freight costs, higher than the Australians.
The expansion program centred on a 90 Mtpa new mine, S11D, with high-quality ore and very low cash costs — about half those of its established production.
Thus, when Vale says, as it did yesterday, that it might “paralyse” or mothball some (about 30 Mtpa) of its higher-cost and lower-quality ore, it isn’t talking about reducing current output but potentially, depending on the market conditions, displacing higher-cost and lower-quality ore with lower-cost and higher-quality new production.
Given the estimated 300 million tonnes of new capacity in the pipeline but yet to enter the sector, even if Vale’s potential 30 Mtpa were an actual reduction from its planned future production volumes, and even if it were added to the 20 Mtpa of BHP production that has been deferred from its future plans, there’s still a massive amount of new capacity overhanging an already oversupplied market.
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