Is this more evidence of downward pressure on commodity prices?
As we have been actively commenting since the start of the year, a key thematic concern we hold for investors in both Mining and Mining services businesses was the potential for commodity prices and in particular Iron Prices to begin to fall. In such an environment, falling prices would result in lower profits and cash flows for our miners and hence we could see significant future risk of projects being either scaled back or shelved in future periods.
Our view is anchored by a supply response in two new Pilbara regions coming on stream over the next few years and also falling demand from the world’s biggest consumer of additional supply, Asia (China).
With Iron Ore falling to $123.6/t, down 9% in two weeks; we are now at a critical juncture.
Critical because this is the price considered by many to be the ‘floor’ / the most Iron Ore prices can fall given China’s own estimated cost of production is $120/t. This compares to Australia/Brazil at $40/t and Canada/USA/Europe $65/t. A price lower than $120/t would make China’s Iron Ore production uneconomic and hence, a fall below this level “just cannot occur”.
Our experience with commodity producers is a little different. Our experience tells us that marginal producers are the first to lose when commodity prices fall materially.
And in this light we continue to expect over the coming months and years we will see lower prices and perhaps, marginal / high cost producers suffering and mining services starved of work. Even if they are operating at full steam right now.
To ask a question: is the recent moratorium of all Greenfield exploration activities by BHP a sign that they see the world in a similar light?
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
