Has the slide in the iron ore price over the past week signalled the closing of a small window for the recapitalisation of marginal producers?
For a few weeks the price had been firming to hold around the $US64 a tonne level, well above the $US47 a tonne seen earlier this year when the collapse in the price was seen as the death-knell for smaller and higher-cost producers. It was that plunge that triggered the failed Fortescue Metals campaign to try to force/coerce Rio Tinto and BHP Billiton into winding back their production.
But over the past week, the price, which had seen some previously mothballed production brought back into the market, has slipped back towards $US60 a tonne. That raises the possibility, indeed probability, that the firming of the price was an aberration.
The most likely explanation for the bounce in the price is that supply disruptions in April and May caused by weather affecting output from the Pilbara and the timing of shipments from Brazil coincided with a low-point in the inventory cycle of China’s steel producers. If that were the case, it would be a temporary phenomenon.
If the edging down in the price over the past week does reflect a gradual return to settings that better reflect the underlying balance of supply and demand, the period that preceded it could represent a missed opportunity for some of the smaller players trying to survive and position themselves for a potentially very prolonged period of much lower prices.
The most obvious company affected by any closing of that window of opportunity would be Atlas Iron, which is in the midst of an attempt to raise $180 million of new equity at five cents a share from its contracts and shareholders as it tries to reduce its destabilising $345m of debt and keep its three small Pilbara mines in production. Atlas is capable of producing 15 million tonnes of ore a year.
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