More on the decline of iron ore
On last night’s Your Money Your Call, we received a number of questions on the sharp recent decline in the iron ore price to the current US$105/tonne.I pointed out that BHP and RIO are forecasting their combined 2014 iron ore production to exceed 500 million tonnes.
So a US$10-15/tonne price reduction would logically cut their combined revenue by $5-$7.5 billion.
In the case of RIO’s 2013 results, iron ore accounted for nearly 50 per cent of their revenue and over two-thirds of their underlying earnings.
Margins were an extraordinary 38 percent – with underlying earnings at US$9.86 billion on revenue of US$26 billion.
RIO received an average US$126/tonne for their iron ore at an AUD/USD exchange rate of $US0.97, or the equivalent of A$130/tonne.
Today, the iron ore price stands at US$105/tonne and at US0.90, this equates to A$117/tonne, a 10 per cent decline.
While this will place pressure on underlying earnings, RIO is forecasting an 11 per cent increase in volumes for 2014, to 295 million tonnes.
Hence, iron ore revenues in Australian dollar terms could be relatively steady.
The issue, however, comes from the following forecasts: Goldman Sachs is calling iron ore to average US$80/tonne in 2015, while Citi is calling the same for 2016.
If this proves somewhat accurate, and the Australian dollar does not fall accordingly, then readers could expect some severe margin compression from our major miners.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
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.
