The iron ore price has halved in the past six weeks, and is set to dip even lower according to some industry commentators, but the West Australian government says there is no need for panic.
WA Premier Mark McGowan admitted the low price of $US106 per tonne was “very concerning” but said the the government — which last year collected iron ore royalties of $11 billion — had budgeted conservatively and would ride out the slump.
“The iron ore price is very concerning but we budgeted very carefully and very responsibly,” Mr McGowan said.
“It’s a risk to our finances, it’s a risk to employment, it’s a risk to the Commonwealth budget, so this is why you have very careful budgeting, because it’s very volatile.
“I’ve said this for the last eight years, you have to be very careful about the iron ore price, because it bounces around a lot.
“That’s why we have quite low levels in the state budget … Over the coming years, we’ve got [the price] at $US66.
“It may well hit that level and that means that hopefully our budget will be pretty right.”
Party couldn’t last forever
Industry commentator Tim Treadgold said while the government had been responsible with its budgeting, there could still be an impact on the state.
“It will hurt the government, but it won’t hurt it that badly,” Mr Treadgold said.
“The WA economy remains robust, healthier than most, it just won’t be as robust as it would like to be.”
Mr Treadgold said the iron ore price was set to be low for some time, as was its cyclical nature, and he believed they would fall even lower before rebounding.
“You can say [the price] is in free-fall and it’s going to keep falling until it finds support and that’s not going to be for some time, and it may be down as low as $70 or less,” he said
“Parties and commodities don’t roll on, they come to a natural end and then everyone heads to the door at the same time. You jam up in the doorway and the price over-corrects.”
It will be ‘survival of the fittest’
The recent price slump is simple to explain, according to Mr Treadgold.
“There’s too much iron ore and not enough buyers. It is, of course, more complicated than that,” he said.
He said the Chinese government crackdown on steel manufacturing pollution was putting pressure on the market, as was concern over troubled property developer Evergrande’s future.
Both of these moves mean there is less Chinese demand for raw materials such as iron ore. There has also been a recovery in production in Brazil, which had previously been struck by a number of workplace accidents.
“We’ve already seen one small miner fall over, that was Venture [Minerals]. Other high-cost mines will follow.
“The smaller, high-cost mines won’t survive as they didn’t 10 years ago.”
It’s a waiting game to see who will shut up shop in the wake of the price slump.
On Monday, junior iron ore producer GWR Group, which mines at Wiluna and ships through Geraldton, went into a trading halt on the ASX, pending an announcement about operations at its C4 Iron deposit, leading to speculation it may shut down operations due to the falling commodity prices.
Cyclical problem to be expected
Mr Treadgold said the cyclical nature of the commodity meant this sort of price drop was not unexpected.
“My memory goes back four decades, closer to five actually, and I’ve seen it repeatedly, this is how it will unfold,” he said.
“So, if you’re an investor and you’ve got shares in an iron ore company, you really shouldn’t be there, you should have got out weeks ago.
“The big one to watch is what will happen with Fortescue Metals, which has fallen dramatically since its high in July [when] it was trading at $26.”
Mr Treadgold said people who were holding out for a dividend may be disappointed at how low their share prices were trading and may wonder if holding out was the right thing to do.
“Yes, it did pay a big, fat dividend, but what you got on the dividend, you more than lost on the falling share price, so it was a fool’s game,” he said.
Fortescue CEO Elizabeth Gaines told the ABC that the company was “agile and responsive to market conditions” to ensure it remained a reliable supplier of iron ore to its customers.
“At Fortescue, we remain focused on the things that we can control — safety, production and cost. FY21 was a second consecutive year of record achievements, with the team delivering outstanding results across all of our key operating and financial measures.
“We have seen a strong start to FY22 with current guidance for iron ore shipments of 180-185mt and a C1 cost of $US15.00-$US15.50/wmt, firmly cementing our industry-leading cost position.”
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