A recent analysis by Standard Bank on the true cost of production throws doubt on how accurate estimates of the Chinese cost curve have been.
The bank, in a note to investors, reviews two recent estimates of the industry’s cost curves made by Fortescue Mining Group (FMG) and BHP Billiton (BHP) in publications this month.
FMG is said to forecast Fe 62% iron ore prices remaining above $120/ton into the long term, while BHP forecasts Fe 62% prices will fall to around $85/ton.
As the bank notes, this $35/ton differential is often the “make or break” for the profitability of many hopeful new iron ore projects, particularly those trying to build Greenfield facilities with complicated Fe processing and upgrading of engineering facilitie,s or for those dealing with lower Fe grades below 58% or those shipping across large distances.
The huge difference in estimates also throws doubt on the point at which domestic producers can no longer compete with imports, and hence provide a sizeable proportion of the supply. One may ask why two major mining firms should have such diverse estimates.
Fortunately, the Standard Bank provides an explanation, stating the difference is due to an issue of interpretation – firstly, how many tons of Chinese iron ore production are considered high-cost and secondly, on what cost range to apply.
by Stuart Burns