The Pilbara based producer almost collapsed two years ago when iron ore prices plunged below $US50 a tonne. (ABC News: Sue Lannin)
Iron ore prices have slumped to around the lowest level since January which could mean big trouble for Australia’s small iron ore miners like West Australian company Atlas Iron.
Atlas Iron hit the big time when iron ore prices reached nearly $US200 a tonne in 2011, during the mining boom.
But the Pilbara-based producer almost collapsed two years ago when iron ore prices plunged below $US50 a tonne.
When the price started climbing again last November, Atlas returned to profit and paid down debt.
Atlas Iron managing director Cliff Lawrenson said it was a near-death experience.
“It’s never easy to come back from where Atlas has been but there is a great spirit in the company, always has been,” Mr Lawrenson said.
“We do see ourselves as a niche player in the iron ore space.”
However, during the March quarter of 2017, Atlas only made about $8 for every tonne of iron ore it mines.
It has a higher cost of production because it has to truck iron ore to port and its iron ore attracts a lower price than the higher grade premium material mined by the big players, Rio Tinto, BHP Billiton, Vale, and Fortescue Metals.
Mr Lawrenson said the company’s iron ore was discounted by about 25 per cent over the quarter despite benchmark prices above $US90.
“Our realised price was much lower than we would have liked,” he said.
“Our view is if we can get the margin to the $10-15 range then that’s very admirable.”
That could be hard if China’s demand for steel wanes. Chinese steel prices slumped in mid-March because of record steel production which sent both steel and iron ore prices tumbling.
Benchmark iron ore prices peaked at nearly $US95 in February and have fallen by around one third since then to just above $US60 a tonne.
MineLife resources analyst Gavin Wendt expects another shakeup of the iron ore industry if the price of the steel making ingredient falls further.
“I think there is a likelihood that the price will pull back to the $US50 — 60 per tonne range by the end of year perhaps even lower,” he said.
“The critical level for most iron ore players, particularly the independent ones, is around $US60 a tonne mark.”
Small miners vulnerable
Steel and iron ore analyst Amy Dong from Shanghai Metals Market thinks prices will dip to about $US55-60 over the next few months which could force small Australian miners to close down.
“If iron ore prices fall then these small miners have to stop production again,” she said.
“I think China’s steel mills may prefer more stable supply from larger miners like BHP, Rio Tinto and FMG.”
Ms Dong said when iron ore prices fell in 2014 and 2015, China imported more high grade iron ore from the big Australian miners.
Mr Lawrenson said volatile prices were the new reality for iron ore miners.
“We might see drops, low price drops, we don’t see it being an ongoing phenomena,” he said.
“We think the macro rationale around a price in the $US60-65 range makes sense.
“Chinese production could come back on but one should bear in mind that’s very low grade material, much lower grade than ours.”
The big players are worried…
Even big players like Rio Tinto are worried that prices could drop if state subsidised Chinese iron ore mines start operating again.
Around one third of China’s iron ore mines have shut since 2013 because of low prices.
Rio Tinto chief executive Jean Sebastien-Jacques told journalists on the sidelines of the big miner’s annual general meeting in Sydney last week that the company was watching developments in China closely.
“The real question mark, and it’s a key source of uncertainty here, is are they are they going to restart some of those mines or not?” Mr Jacques said.
“We’ve got around 200 people in China, in Shanghai and Beijing and that’s a big chunk of their work is trying to understand exactly what is happening in the marketplace.”
Atlas Iron has to truck its iron ore to a smaller port called Utah Point at Port Hedland. (ABC News: Sue Lannin)
Like other iron ore minnows, Atlas has diversified into other minerals, such as lithium, which is used to make batteries.
Despite the uncertainty ahead, the Atlas Iron boss, Cliff Lawrenson, thinks the company will survive, even if it has to transform itself.
“We are certainly thinking about doing things other than iron ore going forward,” Mr Lawrenson said.
“It’s quite clear to us, and this classic textbook stuff, that if you are in a specialist commodity as we are, a pure play operator is always going to struggle unless they get to the bottom of the cost curve.”