Australia's largest iron ore producers are on track for record volumes this year and even higher in 2016, as they continue to lift production despite falling prices.
UK-Australian mining firm Rio Tinto is on track to meet its 2015 iron ore production target of 340mn t, increasing its production by 12pc against a year earlier. UK-Australian resources firm BHP Billiton is targeting a 7pc increase in production from Western Australia (WA) in the year to 30 June to 270mn t. Only the delayed start-up of the Roy Hill mine is providing any relief to smaller producers trying to compete with the increasingly oversupplied market.
Rio Tinto and its partners are currently shipping at a weekly rate of around 6.8mn t out of their WA operations. This combined, with its Canadian operations, puts Rio Tinto on track to ship around 94mn t of ore during October-December and 339mn t for 2015 on a 100pc basis.
Rio Tinto shipped 91.3mn t of ore from its WA operations during July-October, which was up by 12pc on April-June. The firm is expected to ship around 20pc more ore in the second half of 2015 than it did in the first half, adding to the oversupply issues facing the market and putting more downwards pressure on prices.
The price for 62pc Fe fines have fallen from $58.10/t cfr China at the end of June to $43.70/t yesterday, as oversupply increases.
The pressure on prices would have been worse if Australian iron ore producer Roy Hill had managed to begin shipments as originally promised in late in September. Roy Hill last week missed its 20 November internal deadline for the first shipment, with industry insiders including WA premier Colin Barnett now forecasting that it will not be until next year.
Roy Hill will take at least 15 months to raise production to its nameplate capacity of 55mn t/yr, although the ramp-up could take as long as 30 months because of the complexity of processing ore from below the water table. Roy Hill had been expected to ship up to 33mn t of ore in 2016, but this may be an over estimate given the delayed start.
While the tailings dam disaster at Brazil's Samarco mine may cut BHP Billiton's global production, the firm still expects WA iron ore production to increase by 7pc in the year to 30 June to 271mn t on a 100pc basis. BHP Billiton has also added infrastructure to support 290mn t/yr of capacity in WA, working to achieve this while keeping capital investments to a minimum.
Australian firm Fortescue is the only one of the large producers not planning to expand shipments over the coming year, with its target of 165mn t in line with the 165.4mn t that it shipped in the year to 30 June 2015.
Fortescue is instead focused on cutting costs to ensure that it can remain profitable should oversupply continue to drive prices lower. The company will breakeven at an average benchmark 62pc Fe iron ore price of $39/t cfr China during the 2015-16 fiscal year ending 30 June. It is aiming to reduce this to $36/t by further reducing its cash costs for delivery of iron ore on vessels from $18/t to $15/t by the end of 2016.
It seems unlikely that smaller Australian iron ore mining firms will be able to cut costs quickly enough to compete against the additional supply from the lower cost large-scale producers, with BHP Billiton and Rio Tinto breaking even at $29/t cfr China for 62pc Fe.
Australian small-scale mining firms BC Iron, Mount Gibson and Grange Resources are losing money at $43.70/t cfr China for 62pc Fe, while Atlas Iron is also losing money if adjusted for the interest payments it has to make, according to research by Switzerland-based bank UBS. Roy Hill has a breakeven price of $41/t if its interest payments are included.
