Australia’s big two iron ore miners, Rio Tinto and BHP Billiton, believe the commodity will continue to be a “wealth generation machine for Australia” and expect volatility to recede, despite the heavy price falls in recent days.
Iron ore may be headed for $US40 a tonne after crashing through $US45 on Wednesday night, dropping more than 10 per cent in a single day. But Rio and BHP say they are well prepared for the possible new normal in prices.
Rio Tinto iron ore boss Andrew Harding told The Australian Financial Review that the iron ore price “is moving around its long-term average after coming off an unprecedented high that was never sustainable”. “We are seeing a pattern play out now that is entirely consistent with the history of all internationally traded commodities,” he said.
The miner has cut costs, and prepared its iron ore division “to manage these fluctuations over the long term”. He maintains that the “long-term picture for iron ore remains sound”, and the commodity will “continue to be a wealth generation machine for Australia”.
Rio and BHP Billiton make solid margins at current prices, given their break-evens (the price at which they are not making or losing cash) are about $US31 to $US32 a tonne, with Rio still the lowest-cost exporter to China.
The third force in iron ore, Fortescue Metals Group, says its break-even is about $US39 a tonne.
Third-tier miner Atlas Iron’s current break-even is about $US53 a tonne. David Flanagan, founder of the struggling junior, insists prices in the mid-$US40’s are “absolutely not the new normal – volatility is”.
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