Natural Resources Industry Insights: Iron Ore

Natural Resources Industry Insights:  Iron Ore

We shed light on the impact of iron ore prices on the mining industry and steps companies are taking to manage price volatility.

With substantial declines in the price of iron ore, many mining businesses are assessing how best to face the challenge of ongoing commodity price volatility and maintaining their financial performance.

There are a number of factors driving the depressed price, which largely relates to the level of supply as demand fundamentals remain strong.

This dynamic is having an impact on the iron ore sector, with mid-tier and junior mining companies, who don’t have the benefit of scale and low unit costs experienced by the top-tier companies feeling the pain most acutely

What are the primary price drivers?

There are a number of factors currently impacting the iron ore price including:

  • The increase in seaborne supply from Australia and Brazil in the short to medium term will outweigh demand growth
  • Cost cutting measures in China are lowering the marginal cost of production thus ensuring that Chinese domestic mines keep producing
  • Moderating GDP and property sector growth in China - putting pressure on steel consumption
  • Reduced impact of inventory restocking – the extent of China re-stocking won’t provide the same support for the iron ore price as it has done in the past due to expensive and scarce credit.

Impact on the mining sector

In light of the softening in the iron ore price, we are seeing an even more concerted move among many companies to cut costs. While near term and current producers have been seeking new methods to reduce costs and maintain margins for some time, the extent of the recent iron ore price decline is placing even greater pressure on the financial performance of marginal producers.

Managing future risk

There are a number of strategies miners can employ to manage future volatility in commodity and currency markets, and lower their risk profile. One strategy includes hedging future commodity price movements, which is even more relevant to businesses with a higher level of debt on their balance sheet.

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