Ya I wasn't surewhat to make of that comment either. At first I thought he meant ore being produced and not on reserve, but I'm not sure if that is all that accurate either
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Where the price eventually settles will be a test of both the strength of the Chinese economy and the assumptions Australian producers have made about competing supplies. It will also have implications for the budget.
The iron ore price hit $US117 a tonne last Thursday, matching the low-point reached in October last year as concerns about the Chinese economy first hit.
Chinese authorities had been battling inflation by imposing restrictions on housing investment and limiting bank lending. The resulting downturn in the property market last year came at the same time as stimulus spending on infrastructure was being wound back.
It was the first time that the downside of the iron ore price had been tested since the system of long-term contracts was abandoned in 2010. However, traders who sold into the downturn were caught short, and the price rocketed back almost 25 per cent to $US145 a tonne as they covered their positions.
Could the same happen again? ANZ commodity analyst Mark Pervan notes that China's official manufacturing index is due out on Wednesday. The purchasing managers index, released by HSBC last week, showed the best manufacturing performance this year. If confirmed, the money could come rolling back into the iron ore market. But the underlying Chinese steel market looks weaker now than it did a year ago. Steel production has held up in China, with the 60.2 million tonnes produced in June one of the highest monthly tallies on record.
However, exports are soaring, as domestic Chinese demand softens. In the past six months, exports have risen 50 per cent to about five million tonnes a month, Pervan says, with those exports not far short of the entire production of the US.
The steel mills have strong incentives to keep producing at full capacity, as their fixed costs are high and they are operating on tiny profit margins. But unsold steel stocks are rising rapidly, depressing prices. China's price for "rebar", used in construction, has dropped from 4350 yuan ($660) a tonne to about 3650 yuan since April. Like the steel mills, the iron ore mines are also still going at full-tilt, but stocks are building at Chinese ports, and are now close to full capacity of about 100 million tonnes. There have been reports of mills concluding distressed sales of stocks purchased at high prices.
The idea that there is a floor price for iron ore of $US120 a tonne is based on the fact that the most expensive 150 million tonnes of Chinese production have operating costs at that level or more. It would have to be a much more serious recession in China than anyone is presently contemplating for China's iron ore demand to fall by that much.
However, commodity markets routinely overshoot in both directions, so the iron ore price could fall to a point that made Chinese iron ore mines deeply unprofitable and remain there for some time before the mine owners decided no recovery was in prospect and closed operations.
Hopes that the price floor will hold are based partly on hopes that the Chinese government will lift its spending on social housing and infrastructure sufficiently to offset the fall in private demand.
Although the authorities are keen to avoid the excesses of the 2008-09 stimulus package, they have flagged they will use spending to support the economy.
Some also argue that the downturn in China is not as serious as feared. The IMF believes the economy is already accelerating from a downturn it says was concentrated in the June quarter. It forecasts China will achieve growth averaging 8 per cent this year and 8.5 per cent next.
Prices at current levels still deliver super-profits to Australian mining companies, which is also critical to the government's budget revenue. The Pilbara mines of BHP Billiton and Rio Tinto have cash operating costs of only $35 to $45 a tonne. Fortescue's costs are not much higher.
Over the medium term, these profits are unlikely to survive. The Bureau of Resources and Energy Economics expects only a very gradual decline in prices, with iron ore still expected to fetch $US109 a tonne by 2017. Its long-term forecasts, published in March, anticipated an average price of $US140 a tonne this year.
Australian National University researcher Luke Hurst suggests this underestimates the impact the rapidly developing African iron ore industry will have on the world market.
China has been building iron ore capacity in Africa to reduce its dependence on Australia and Brazil. There are about 30 iron ore projects planned or under development across the continent.
Hurst has analysed 17 of the most developed, which are divided into 27 production expansion phases. If only the six projects already under construction or firmly locked in are developed on schedule, there would be another 31 million tonnes a year of capacity by 2018. If the 10 medium-risk ventures, including Rio Tinto's Simondou project in Guinea, are developed, there would be an additional 166 million tonnes of capacity. If all 27 projects are developed, it would add add 481 million tonnes a year of capacity by 2018, roughly the level of Australian production now. Many of these projects have low production costs and high grades.
Hurst says even if only the most assured projects were developed, it would add to overcapacity and reduce the world iron ore price to about $80 a tonne, with much of China's existing iron ore production forced out of the market.
If the medium-risk ventures are developed, the price would drop further to $65 a tonne, while the full development of all projects would lower it to $60.
These prices would still leave the major iron ore miners in profit, although new producers, such as the Sino iron ore project of China's CITIC Pacific on Clive Palmer's leases would be deep underwater.
But it would be much more like the low-margin and high-volume earth-moving operation that iron ore always used to be before the China boom gathered a head of steam. The income expectations of both investors and the government would have to be downgraded accordingl