(Repeats story that ran earlier in the day, with no changes to
--Clyde Russell is a Reuters columnist. The views expressed are
By Clyde Russell
LAUNCESTON, Australia, Sept 3 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
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
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
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.
IRON ORE, JUST LIKE COAL?
Iron ore is now in a structural oversupply situation, which
like coal, is likely to get worse in coming years.
However, Vale, Rio Tinto and BHP hope to make good profits
as competitors leave the market.
The script is so far going according to plan, but the big
three miners may have opened a Pandora's Box, because as the
coal experience shows it's really hard to arrest prices once
they start dropping, especially if supply is growing rapidly.
Asian spot iron ore .IO62-CNI=SI fell to $86.70 a tonne on
Tuesday, the lowest in two years and less than half of the
post-2008 peak of $191.90 in February 2011.
China, which buys about two-thirds of global seaborne iron
ore, is still showing healthy growth in imports, with total
imports up 18.1 percent to 539.68 million tonnes in the first
seven months of the year, compared to the same period last year.
The impact of the higher volumes from Rio Tinto's and BHP's
Australian mines shows up with imports from Australia rising
33.4 percent to 306.75 million tonnes, while those from Brazil
are up 13.5 percent to 94.56 million tonnes.
This shows that the lower-cost ore from Australia and Brazil
is displacing more expensive imports, and also Chinese domestic
output, just as it should in an efficient market.
Problem is that the big three miners appear not to be able
to help themselves, and are bringing on way more capacity than
even China is likely to be able to absorb.
Rio Tinto aims to boost output to 295 million tonnes this
year, from 266 million last year, and plans to reach 360 million
BHP produced 225 million tonnes in the year to end June
2014, plans to increase this to 245 million tonnes in the
current financial year and to 290 million tonnes in the next few
Vale wants its output to jump from 306 million tonnes last
year to 450 million by 2018.
Adding to this, number four-ranked Fortescue Metals Group
aims to boost output from its Western Australian mines
to 160 million tonnes, from about 125 million in the past
Billionaire Gina Rinehart also plans to start her
55-million-tonne-a-year Roy Hill mine in Australia ahead of the
planned September 2015 commencement.
MARKET SWAMPED WITH NEW SUPPLY
Adding the expansion plans of these five companies together
brings an additional 393 million tonnes to market in the next
few years, just from Australia and Brazil.
Anglo American is also likely to bring its 26.5
million tonne a year Minas Rio project on line within that time
period, and there is also the possibility of more supply from
That's a lot of new iron ore to displace relatively little
Chinese imports for July from Australia and Brazil were
about 64.5 million tonnes together. All the imports from every
other country together were about 17.6 million tonnes.
Assuming July's imports, which were the third-highest on
record, are maintained, it implies that the rest of the world's
shipments to China would be around 211 million tonnes a year.
This is roughly half the new supply expected from Australia
and Brazil in the next few years, meaning that the major iron
ore miners are betting not only that they can displace everybody
else from the seaborne market, but also force Chinese domestic
output to decline by about 200 million tonnes, on a 62 percent
iron content basis.
That would equate to shutting about 40 percent of China's
domestic iron ore capacity, which is a big call for the global
The problem for Vale, Rio Tinto and BHP is that for now they
can eat the lunch of their smaller competitors.
But when they finish that, they will have to start eating
each other, just as the coal industry has done.
This means the iron ore price may fall by more than they
expect, and stay down for longer.
Disclosure: At the time of publication Clyde Russell owned
shares in BHP Billiton and Rio Tinto as an investor in a fund.
(Editing by Muralikumar Anantharaman)