Iron Ore Miners: Struggles Ahead, Especially Juniors
BMI View: The downtrend in the Bloomberg Iron Ore Mining Index will persist over the coming quarters as mining equities remain under pressure from lower iron ore prices compared to the boom years in 2010 and 2011. Junior miners will struggle to survive due to funding constraints. Meanwhile, many Chinese projects will become economically unviable at prices below USD120/tonne. Indian miners will also grapple with problems surrounding mining restrictions and the temporary mining ban in Odisha.
We expect the downtrend in the Bloomberg Iron Ore Mining Index since 2011 to persist over the coming quarters. Iron ore prices will come under sustained pressure from a growing supply glut as a result of the economic slowdown in China. We forecast iron ore prices to average USD115/tonne in 2014 and USD105/tonne in 2015, significantly below the average price of USD135/tonne in 2013. This implies further pain ahead for mid-sized and small iron ore miners, many of which are already beset by a string of challenges.
We believe the growing dominance of the big three miners - BHP Billiton, Rio Tinto and Vale - will push smaller players to the sidelines over the coming quarters. These majors derive significant economies of scale from their operations in Australia and Brazil, both of which are home to high-grade hematite ore that substantially lowers the cost of production. As illustrated by the chart below, the majors sit comfortably at the lowest end of the global iron ore cost curve.
|Stuck In Downtrend|
|Bloomberg Iron Ore Mining Index (Weekly Chart)|