Iron ore miners weather the cyclical storm
Monday, March 14th, 2022
A volatile iron ore price caused a few headaches for burgeoning producers in late 2021, but a first quarter recovery has allowed some to return bigger and better in 2022.
While the wider mining industry continues its battle with issues of labour shortages and border restrictions, the price of iron ore has been both a blessing and a curse over a short period.
Rising to record highs of $US230 ($294) per tonne in May last year, before diving to $180 and rising above $200 again from June through July, it provided miners with plenty to consider.
Australia-China relations were stretched by Chinese restrictions on steel production, but analysts were sure the tides would turn and iron ore prices would return to usual programming.
But a mountainous dive was to come, as iron ore prices caught up with the curb in steel production and more than halved in the space of two months.
From July to September, the price dropped another $130 per tonne and several of Australia’s growing iron ore producers were brought to unfeasible standstills.
By mid-November, a secondary dive saw the iron ore price bottom out in the low $80s per tonne and the likes of GWR Group, CuFe, Venture Minerals, Indus Mining and Mount Gibson had all halted mining operations citing iron ore prices.
GWR chair Gary Lyons foreshadowed in September his company was well prepared to outlast the pricing lull in Australia’s top export.
“Whilst it is disappointing that mining operations have temporarily ceased at the C4 iron ore mine, it is important to note GWR remains in a strong position to resume operation as the mine will be left in a production-ready state in order to take advantage of a recovery in iron ore prices,” Lyons said.
And outlast they did. By the turn of the new year, the iron ore price had been above $100 per tonne for more than three weeks and showed few signs of slowing down.
Come the middle of January, GWR was able to recommence mining operations at C4 as prices rose past $120, while the company continued its haulage operations and sales had continued over the holiday period.
Lyons said while he was optimistic in September about seeing this result, he admits to being thankful it turned out for the best.
“There was certainly no expectation on my part, so you’d have to say the feeling is more so one of relief that we were able to start operations again,” Lyons told Australian Mining.
“However, although we’d ceased mining activities, we hadn’t stopped moving product. We had a stockpile and we’ve continued to make some sales and haul some product to the port.”
By February, GWR had returned to full production at C4, with several sales locked away for the months to come.
At time of writing, GWR’s publicly announced sales included one March shipment for $110 per tonne; April, May and June shipments at $111 per tonne; and one July shipment for $114 per tonne.
Lyons said he was happy to secure the near-term future of the company in uncertain times.
“It is great to see the flagship C4 iron ore mine back in full production. Having worked through the recent volatility in iron ore prices, the GWR team has been able to refine its operations focused on cost reduction and fixed price contract shipments,” he said.
Lyons added it was important to secure these sales to avoid any disappointment caused by future market crashes.
“These sales were at a fixed price and on an FOB (free on board) basis simply because of the fluctuations in shipping costs and I didn’t want to be exposed to that volatility,” he said.
“The volatility is not only in iron ore price and shipping, but also in currency exchanges. I just hedged our bets wherever I possibly could to know exactly what we’re going to be banking.”
Lyons’ advice to anyone in a similar position to GWR’s was to protect against the future by securing it ahead of time.
“I’m not sure I’ve done anything too clever or smart, but when we’re considering our shareholders and the many mums and dads out there, security is key and it’s critical we’re able to continue mining operations while delivering product with some sort of margin,” he says.
In the case of GWR’s C4 iron ore mine, with a 750km drive to the Port of Geraldton for stockpiling, the operation is far more susceptible to falls in iron ore price than most.
This caution may well have been the right tact in this scenario, as PwC partner Marc Upcroft said 2022 may see similar behaviour in the iron ore price as in 2021.
“I think that volatility is going to be a theme we see in 2022 again. We are going to see demand changes,” Upcroft said.
“The way iron ore works is supply is not quite fixed but not quite as variable as demand is, which is why when we see changes in demand we see significant price changes in iron ore.”
With such distance between the C4 mine and its nearest port, Lyons recognised his company’s burden of higher-than-average production costs.
“We’re always going to be the last to commence mining and the first to stop, simply because of costs associated, particularly with logistics from mine to port,” he said.
“We’re very sensitive to any price movement and I always say, ‘a sparrow in the hand is better than the eagle sitting on the roof’, so I’m always very focused on protecting margins.”
This aligns with forecasts from Wood Mackenzie senior analyst Kim Christie, who remains optimistic for miners like GWR.
“Small mines tend to be higher cost operations so these operators will remain cautious in regard to their outlook for prices, particularly as 2022 progresses,” Christie said.
“Having said that, even at $90 per tonne, most will be making decent margins so we think that 2022 will still be a positive year for most Australian iron ore producers.”
Lyons said he plans to take this forecast and run with it – at a responsible pace, of course.
“We still have more iron ore to sell, I haven’t locked everything away. But if we see another rise in iron ore price then I’ll be looking to take advantage of that and hedge out even further,” Lyons concludes.
Overall, the iron ore price remains promising in an Australian landscape that has been historically very favourable toward the production of iron ore.
With the country’s proximity to major iron ore importers like China, Japan and Korea, and the high quality of the ore, Australia is well placed to weather any more financial storms that come its way.
“For the average iron ore producer in Australia, our average production cost is still really low, which means greater profits,” Upcroft said.
“The iron ore sector is still quite healthy overall.”