Overnight also saw mining giant Anglo America cut its iron ore production, which is a significant positive for the Australian majors BHP and Rio Tinto, in our view.
What Happened – Iron Ore Bounce
Iron ore advanced 1.1% to $US46.78 a dry ton overnight, which is the highest since November 16 2015. The commodity appears to have bottomed at $US38.30 in December, the lowest for daily prices dating back to May 2009. Although it is still in the early stages of a recovery, there a number of positive factors assisting with the price bounce.
Overnight Anglo America, one of the largest global iron ore producers, committed to ceasing its iron ore production after the 99-year-old mining company lost US$5.6 billion last year. In the late 2000s, it followed an industry-wide expansion into iron ore to capture China’s booming appetite for steel and piled on debt to pay for it. Anglo has paid the price. It couldn’t compete with its higher-cost operations and US$12.9 billion debt load. Anglo said that it’s now focusing on raw materials with better consumer demand, such as gems, platinum and copper.
BHP & Rio Set to Benefit
The lowest-cost producers in the world, BHP Billiton and Rio Tinto have purposely increased their production to force the higher cost producers from the market. Their plan of game theory finally appears to be paying dividends with Anglo America being the first major causality. believes, that ultimately the industry will be a lot more efficient after the miner exodus. All miners have had to significantly cut costs given the fall in material prices. Further, the few that survive will have significantly less competition to compete once the high cost producers have left. What will result is an extremely efficient, low cost producing industry with very few players to participate. Over the long run this is very positive.
However, at the current juncture, the battle for iron ore supremacy continues. About 1.36 billion metric tons of iron ore was shipped around the world last year. That’s roughly 73% more than 2007. Further, as much as 266 million tons in new production will be added over the next three years before supply is curbed from 2019. Although the recovery in the industry will not be instant, over the longer run the outlook is positive in our opinion.