Sinking iron ore price hits smaller producers

Casualties are mounting among the world's smaller iron ore producers as the steelmaking ingredient continues a dramatic plunge, with little sign of a rebound.

Atlas Iron was the latest to be hit. The Australian group said on Friday it would suspend mining operations this month, followed by a halt in exports, depending on market conditions.

Iron ore fell to $47 this week, down almost a third since the start of the year, and at the lowest since the Steel Index started compiling the data in 2008. Futures for September delivery on China's Dalian Commodity Exchange have fallen 25 per cent this year to a record low on Friday.

But supply shows no signs of abating. China unveiled measures this week to support its domestic industry, lowering taxes starting May 1, even as the world's largest miners, BHP Billiton and Rio Tinto continue to send iron ore to the country's ports.

China's move to reduce the iron ore tax, levied on volumes produced, should help local miners by reducing costs by about $3 to $4 a tonne, according to Melinda Moore, an analyst at Standard Bank.

That could further disadvantage seaborne iron ore from elsewhere, especially producers that are only just making a profit at current price levels.

With 270m tonnes set to come from the big producers in the next few years, it was uncertain where the bottom for iron ore would be without a recovery in demand, Ms Moore said.

Many analysts underestimated the slowdown in China's steel consumption, predicting continued growth from further urbanisation. In 2007 Chinese demand exceeded the supply of iron ore, prompting large mining investments. Those forecasts have been pulled back, and many industry observers expect a peak in Chinese consumption and production this year.

Average daily output from the country's large steelmakers dropped 2.2 per cent in the last 11 days of March, according to the China Iron & Steel Association.

Any support for iron ore production in China would only delay a needed correction of the iron ore market, Fitch Ratings said.

"Although the tax cut may increase low-cost miners' profitability in China, the impact is likely to be limited and shortlived as the cost benefit will be eroded by competition," said analyst Stella Wang.

Atlas said it was in discussions with creditors over options to enable mines to restart if operating margins were re-established through cost reductions or improvements in the price.

"Based on the significant percentage of global iron ore production which is now cashflow negative . . . prices will ultimately increase," the miner said. "However, the timing of a recovery is unclear, leaving Atlas with little choice but to take decisive action to protect its balance sheet and resource position."

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