Where will the price of iron ore go from the expansion and reduction of large mines?

In addition to Vale, Rio Tinto, BHP Billiton and FMG have all released iron ore production reports for the fourth quarter of 2015, which BHP Billiton and FMG call the second quarter of fiscal year 2016. According to the output reports issued by the three iron ore producers, the output of the three major iron ore producers in the fourth quarter basically met their production expansion expectations. Unexpectedly, Vale, which has yet to report quarterly iron ore production, will also keep growing. With the shipment of the first batch of iron ore from Mount Roy in December 2015, iron ore supply is expected to increase by 30 million tons by 2016.

In 2014, iron ore prices fell from $133 at the beginning of the year to $70 at the end of the year, and from $70 at the beginning of the year to $42 at the end of 2015. In 2014 and 2015, the price of iron ore fell by 47% and 40% respectively, and the two time was almost cut. Moreover, at the end of 2015, iron ore prices fell below the "40" mark.

According to data released recently by the international iron and Steel Association, the global crude steel output in 2015 dropped by 2.8% over the same period last year. On the one hand, the supply of iron ore continues to increase, on the other hand, the demand side of the crude steel production has fallen considerably. We can not help asking whether iron ore prices will continue to decline in the first 2 years in 2016. And even further break down the "30"?

Large mines: expansion and reduction

In the fourth quarter of 2015, the output of Rio Tinto, BHP Billiton and FMG amounted to 1.89 billion tons. At the same time, the four major iron ore miners, including Vale, have begun to put cost reduction and efficiency first in order to remain competitive and increase their cash flows as iron ore prices fall.

According to Rio Tinto's Jan. 19 production report, its 2015 cumulative iron ore production and shipment volume to a new high. In the fourth quarter of 2015, Rio Tinto's iron ore output increased by 1.3% to 87.16 million tons (70.43 million tons in Rio Tinto's equity), an increase of 10.2% over the same period. Rio Tinto explained in the report that the increase in output was mainly due to improved production efficiency and the completion of infrastructure expansion in the Pilbara region, where iron ore production increased by 1.1% to 82.26 million tons, an increase of 9.3% over the same period of the year.

Sam Walsh, Rio Tinto's chief executive, said that despite the challenges facing the international steelmaking raw material market in 2015, Rio Tinto still ensured its low-cost competitive advantage by improving production efficiency, strictly controlling production costs and optimizing asset allocation, in order to achieve sustainable growth and provide a sound return for shareholders. Newspaper. In 2015, the output of Rio's main products reached the target set at the beginning of the year. Wales also stressed that in 2016 Rio Tinto will continue to focus on cost and capital expenditure control to maximize cash flow.

BHP Billiton's iron ore output in the second quarter of fiscal year 2016 (fourth quarter of 2015) was 56.96 million tons, down 7.1% from a year earlier and up 1.1% from a year earlier, bringing BHP's iron ore output to 118 million tons in the first half of fiscal year 2016, up 418 million tons from a year earlier, according to a production report released on January 26. .3%, a record high. BHP Billiton will maintain the total output target of iron ore in 2.7 years in the year of 2016. In addition, BHP Billiton's iron ore rights and interests target for fiscal year 2016 was reduced by 10 million tons to 237 million tons as Samako suspended production.

Andrew Mackenzie, chief executive of BHP Billiton, said commodity prices fell sharply in the first half of fiscal year 2016, putting pressure on the entire resource sector. BHP Billiton will continue to cut costs, ensure safe and efficient operation performance, and further enhance business strength. At the same time, in the current environment, BHP will be committed to ensuring a sound balance sheet so that there is sufficient financial flexibility to cope with future commodity market price volatility. In the second quarter of fiscal year 2016, FMG's iron ore output was 44.8 million tons, an increase of 3% year-on-year and a decrease of 1% year-on-year; iron ore shipments were 42.1 million tons, up 2% year-on-year, flat. FMG said in its output report that its iron ore production demand is strong, cost control has also been effective, its cash costs fell sharply to 15.8 U.S. dollars / ton in the quarter, down 45% year on year.

Nev Power, FMG's president, said: "FMG's production costs have been sustainably reduced for eight consecutive quarters, and the cost reductions have led to strong cash flows enabling the company to reduce its net debt to $6.1 billion this quarter. Vale is also stepping up efforts to develop cheaper S11D projects. It is reported that the project has now completed about 75%. At the same time, Vale also intends to reduce the production of high-cost iron ore, with a view to further reducing the overall cost of iron ore. However, growth in iron ore production is also expected to decline as capacity releases from around 2011 come to an end and there is no large-scale follow-up expansion. Rio Tinto said in an official statement that its iron ore production in 2016 will increase by about 7% to 350 million tons, down from 11% in 2015. BHP also announced that it expects its iron ore production in Australia to increase by 6%, down from 13% in 2015.

Small and medium mines: the living space is further squeezed.

With iron ore prices falling again and again, the continued expansion of the four major miners has been plagued and questioned by market competitors. But for now, this expansion strategy seems to have begun to work. According to data released by the Chinese Customs, China's iron ore imports reached 952.72 million tons in 2015, an increase of 2.2% year-on-year, a record high. According to Bloomberg statistics, Australia's share of iron ore exports to China jumped to 64% in 2015, compared with 59% in 2013 and 51% in 2014. Brazil's iron ore exports to China also increased from 18% in 2014 to 20%. Obviously, the expansion of iron ore giants has further grabbed market share, leaving more high-cost iron ore producers out of the market.

Ralph Leszczynski, head of research at Banchero Costa, a shipping brokerage, said the big miners were right in the battle for market share. Moreover, Brazilian iron ore companies will benefit from lower shipping and inventory costs for commodities. Indeed, at present, many small and medium-sized iron ore producers with higher costs are facing increasing pressure to operate, and have lowered future output expectations or even withdrawn from the iron ore market. In mid-December 2015, Anglo American plc, the world's fifth-largest iron ore producer, announced that it would sell 60% of its mines and smelters in the future and restructure its business entirely. At the same time, Anglo American resources will lay off 85 thousand people, and the number of layoffs will account for 2/3 of the company's total number.

On Jan. 28, Anglo-American Kunba Iron Ore Company in South Africa said it would scale down its operations, reduce costs and plan to cut staff at Sishen Mine, Africa's largest iron ore mining company. Prior to this, Anglo American Resources has suspended its 26 million-ton annual Minas Rio project in Brazil, which is expected to be postponed until 2018. Anglo-American also plans to cut costs by $1 billion in 2016, while reducing its iron ore output from 36 million tonnes to 26 million tonnes in South Africa, by 30% compared with 31 million tonnes in 2015. Mount Gibson Iron, an Australian iron ore producer, is considering closing some exploration projects and cutting costs through layoffs and new shifts as it continues to bear heavy pressures as iron ore prices linger at long-term lows. Despite significant increases in iron ore sales and operating revenue in the fourth quarter of 2015, Jim Beyer, chairman of the iron ore company, said: "Considering freight spending and the Australian dollar exchange rate, the company is still facing greater operational pressure."

It is reported that the operation of Gibson Hill Iron Mine will face a wide range of adjustments, as planned to promote the development of the Iron Hill deposit, while monitoring the feasibility of the Extension Hill project to continue to operate. It is expected that it will close the Koolan Island project and the Extension Hill project in Kimberley, West Australia. The cost of cash in the fourth quarter of 2015 was about A$47 a tonne (33.1 U.S. dollars per tonne at the Feb. 3 exchange rate), according to Gibson Hill Iron Mine's previous fourth-quarter operating report. BC Iron Ore, also an Australian iron ore company, has also been affected by the steep fall in iron ore prices over the past year, with its 75% stake in the Neulagine project recently declared closed. At the same time, China's small and medium-sized mines have also been shut down and reduced production. According to the statistics of relevant agencies, by December 3, 2015, the starting rate of iron ore mines in China was only 42.4%, less than half.

Iron ore Market: low operation will continue

The price of iron ore has been cut off in 2014 and 2015. Will 2016 continue to decline? Many agencies seem to be more inclined to give positive answers. On January 26, the World Bank released its annual commodity outlook, lowering its price estimates for 37 of the 46 major commodities. In its quarterly outlook, the World Bank pointed out that iron ore demand was near its peak due to weak demand in emerging markets and continued overcapacity, with the average price of iron ore expected to be $42 per ton in 2016, down 25 per cent from 2015. Meanwhile, the World Bank's iron ore price outlook for 2017 is down 28% to $44.10 per ton, and iron ore prices are expected to remain below $50 per ton by 2019. "In 2016, the price of iron ore is likely to be below 30 US dollars / ton." Ivan Szpakowski, Asia's head of commodities research at Citigroup, recently said. Ivan predicted in a report that iron ore prices in 2017 and 2018 were both $35 a tonne, down from the previous forecast of $39 a tonne and $40 a tonne. In the worst case, the average price of iron ore will drop to $28 / ton in 2018.

In fact, at the present time, there is no basis for sustained rebound in iron ore prices. China is a big importer of iron ore, accounting for two-thirds of the world's iron ore shipping volume every year. Its demand directly determines the changes in the global iron ore supply and demand relationship. Goldman Sachs has previously lowered its target price for iron ore to $38 a tonne for 2016 and to $35 a tonne for 2017 and 2018. China's crude steel output in 2015 was 804 million tons, down 2.33% from a year earlier, according to statistics released by the China Bureau of Statistics. According to the prediction of the international iron Association (WSA), China's crude steel output decreased by 2% in 2016. Just on January 22, Premier Li Keqiang of the State Council called for a further reduction in China's crude steel production capacity of 100 million to 150 million tons at a State Council executive meeting. China's steelmaking industry is about to start a massive capacity cut, which will further deprive iron ore prices of support.

In addition, the exchange rate of the main exporters of iron ore has also affected the change of iron ore prices to a certain extent. In 2015 alone, the Brazilian real, the main exporter, fell by more than 40% and the Australian dollar fell by 15%, greatly reducing the cost of iron ore exports. This year's Fed rate hike is expected to push the dollar stronger, putting downward pressure on U.S. dollar-denominated iron ore prices.