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Mines face closure on iron ore price slide

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    From this morning's Fin Review:

    Mines face closure on iron ore price slide

    PUBLISHED: 6 HOURS 20 MINUTES AGO | UPDATE: 1 HOUR 16 MINUTES AGO



    Plunging ire ore prices are threatening three Australian mines with closure.
    Photo: Erin Jonasson


    TESS INGRAM

    Three Australian iron ore mines are at risk of closure as the profitability gap between the major producers and the rest of the sector widens, says resources consultancy Wood Mackenzie.

    The price for the key steel-making commodity was just $US61.20 a tonne on Tuesday, the lowest since May 2009 when the current pricing system was introduced. The relentlessly plummeting price is down 14 per cent this year after crashing 47 per cent in 2014.

    While the Australian iron ore sector has been buoyed by a falling Australian dollar and cheaper freight rates, three higher-cost mines are at risk of closure if the price continues to languish around $US60 a tonne, Wood Mackenzie senior analyst Andrew Hodge said.

    The consultancy issued a note to clients in December flagging Arrium's Peculiar Knob mine, Cliffs Natural Resources' Koolyanobbing mine, Mineral Resources' Carina mine and Grange Resources' Savage River mine, as being at risk of potential closure.

    Peculiar Knob was mothballed in January when the beleaguered steel maker announced it was shuttering one of its two mining precincts, taking four million tonnes out of the market.

    Mr Hodge said while the conditions had improved slightly since December, Koolyanobbing, Carina and Savage River remained at risk.

    "For these mines, the issue is a combination of long road-haul distances and higher strip ratios," he said. "Some of those mines have some of the highest strip ratios around Australia which increases costs quite substantially and also to haul the ore to get it to the processing facility and then to take it to export, is expensive. Significant port fees are also an issue . . . so these companies have a lot of costs involved."

    Adding to the potential problems for the sector is the reality that cost relief from freight charges, the oil price and the exchange rate, could change at the drop of a hat. Mr Hodge is confident the majority of the mid-tiers have made sustainable cuts but Morgan Stanley analysts warned in a note last week the relief was regarded as "fleeting".

    Atlas Iron, BC Iron and Mount Gibson Iron have been heavily scrutinised by the market since the price began to fall. Mr Hodge said the companies had made "tremendous" cost-cutting efforts, especially through negotiations with contractors but it was unlikely any more savings could be found within contracts.

    "Similarly to coal, we don't believe there is a great deal more left to happen there but with oil prices expected to remain low for the next year or two and the dollar falling, we expect these guys will be able to maintain their position through until a recovery," he said.

    As the rest of the sector battles costs to remain sustainable, the major miners, such as BHP Billiton and Rio Tinto, have confirmed their low cost expansions are progressing well, paving the way for even higher output in late 2015 and 2016 and widening the gap between them and the rest of the sector, Wood Mackenzie said in a note on Tuesday.

    In December, the consultancy lowered its iron ore price forecast for 2015 and now expects the price to average $US70 a tonne for the year. Mr Hodge said after depressed prices in the first quarter of the year, a brief seasonal price recovery is expected in the second quarter before more new tonnes from Fortescue Metals Group, BHP Billiton, Roy Hill and Anglo American come online later in the year and push prices back down.

    Last week, Morgan Stanley warned its "increasingly bullish forecast" of an average $US79 a tonne this year depended on a lift fromChina's "underperforming steel sector". The bank's expectations are higher than most after a string of analysts took a knife to their forecasts in the first few weeks of the year. Citi has a bearish forecast of $US58 a tonne for the year while the Bureau of Resources and Energy Economics estimates an average of $US63 a tonne.

    The Australian Financial Review



    Cheers,

    Samson.
 
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