Record Iron Ore Shipments: Which Companies Will Survive?

Australian shipments of iron ore to China recorded a new milestone in August. Exports from Port Hedland climbed to 33.9 million tonnes in August. That was up from 29.5 million tonnes over July, a 14% increase.

Meanwhile, total exports for August came in at 39.2 million tonnes. That’s up from 35.3 million tonnes in July.

The August rebound was partly expected.

It came on the back of unusually low shipments in July. Exports in July fell 9.6% over June, which was an eight month low.

Meanwhile, exporters also received a boost from rising iron ore prices in August. Prices ticked up 5%, having hit a low of US$44.59 in July.

Strong shipments are expected to persist for the rest of the year. Forecasts show exports rising to 748 million tonnes in 2015. That could expand to 824 million tonnes in 2016, according to the Department of Industry & Science.

Yet while rising exports seem positive, they’re anything but. These record shipments are a sign of the troubles facing the industry.

Iron ore competition driving producers to the edge

The iron ore industry is playing a zero-sum game.

The race to the bottom is forcing many producers to the brink of closure. At the heart of this is the issue of profitability.

The commodity slump threatens the existence of producers with lower profit margins. At the same time, low-cost producers are making life as difficult as possible for uncompetitive miners.

BHP Billiton [ASX:BHP] and Rio Tinto [ASX:RIO] lead the way here.

The big two Aussie giants are lifting their total outputs of iron ore. It’s all part of a market-share driven expansion strategy. By raising supply, they keep prices lower than they otherwise might be. And that puts more pressure on less competitive producers.

At the same time, it helps boost their own sales in a market struggling with low prices.

To date, it’s been a very successful strategy. And it’s one that’s putting the ongoing viability of competitors in question.

Will smaller producers survive in the long run?

The prospects for smaller producers look particularly grim right now. There’s simply no guarantee that all of them will survive.

Atlas Iron [ASX:AGO] shares are trading at $0.03 apiece. Last month the company announced losses of $1.4 billion for the year. It’s shut down production at three of its mines in the last 12 months. But Atlas’ CEO David Flanagan still believes the company has a bright future ahead.

From whatever position we’re at there’ll be a lot of other iron ore producers who will fall out of the iron ore market before us and that will keep things tight’.

Flanagan is paid to be an optimist though.

It’s hard getting away from the harsh realities facing Atlas. The company is valued at $80 million less than this time last year.

Its share price, meanwhile, has plunged from $0.60 to $0.03 over the same period. To top it off, it’s loaded with $276 million of debt.

Yet Atlas isn’t the only struggling producer.

Mount Gibson Iron [ASX:MGX] is another producers with an equally shaky future. It recently posted a $911 million loss for the financial year. Annual revenues declined 64% to $325 million. Shares are trading at $0.17 apiece, down from $0.66 a year earlier.

Meanwhile, Fortescue [ASX:FMG] announced yearly net profits of AU$435 million in the year to June.

Profits are better than losses. But Fortescue’s profits slumped 88% from last year. Total earnings amounted to AU$3.43 billion. That’s down on AU$7.76 billion from a year earlier.

The future for all three is uncertain. After all, all three producers rely on cost-cutting programs to stay afloat.

Fortescue is also surveying the option of selling stakes in key assets too.

Both strategies are an admission that growth is harder to come by through traditional means.

What no producer can rely on a recovery in iron ore prices. The outlook suggests prices are heading much lower.

Investment bank Goldman Sachs forecasts prices bottoming out at US$40 by 2019. That’s US$16 a tonne lower than current levels. And it’s far removed from prices of US$180 a tonne from a few years ago. These low prices will test the resolve of all low profit margin producers.

Whether cutting costs is enough to stave off BHP and Rio’s expansion strategy remains to be seen. That may buy them some time. But what they really need is a price recovery that’s not coming.

For now, BHP and Rio remain the mainstays of the industry. Their position is under no threat. As far as the rest are concerned, their future is less certain. Don’t be surprised if one, or more, hits the walls over the next few years.

Mat Spasic,

Contributor, Markets and Money

PS: The Aussie share market had its worst month since 2008 in August. The ASX lost 9% of its value, shedding more than $70 billion.A bear market is taking hold of the ASX, following in the footsteps of global markets.

Markets and Money’s Vern Gowdie saw this coming. He predicted the current market correction at the beginning of the year. But Vern says we haven’t seen the worst of it yet. He’s convinced the ASX will lose as much as 90% of its market cap in the coming months.

Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s ranked as one of Australia’s Top 50 financial planners. And he wants to help you avoid this coming wealth destruction.

That’s why he’s written ‘Five Fatal Stocks You Must Sell Now’. As a bonus, this free report will show you which five blue chip Aussie companies could destroy your portfolio… and you almost certainly own one of them. To find out how to download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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