Mining meltdown: Iron ore slump sends shockwaves through industry

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A few miles from the desert outpost of Wiluna in Western Australia’s Mid West region, an open pit mine lies dormant.

Work at the ‘C4’ site has been suspended by its owner GWR for 30 days after iron ore prices collapsed, sending shockwaves across the global mining industry.

The price of this vital steel-making ingredient is highly volatile. But the speed and scale of the slump, driven by falling demand for steel from China, has caught the market by surprise.

© Provided by This Is Money Work at the ‘C4’ open pit mine in Wiluna in Australia’s Mid West (pictured) has been suspended for 30 days following the collapse in iron ore prices

With iron ore prices halving in the space of just six weeks, GWR has concluded it is no longer worth digging the vital commodity out of the ground until they bounce back.

GWR is just a small player, but its decision to down tools underlines how rapidly the iron ore boom, which fuelled record profits and dividends for shareholders, has fizzled out.

The minnow’s announcement to the Australian stock market last week certainly spooked investors in blue-chip mining stocks, who have seen the iron price soar to a record high in May before slamming into reverse. Prices are now hoovering around $120.

Billions of dollars have been wiped off the value of mining stocks including heavyweights Rio Tinto and BHP – which are both, for the time being at least, dual listed in London and Sydney. 

There is no danger of Rio or BHP suspending production as their lower costs means they can still make money even when iron ore prices are at rock bottom. 

But the fall in the value of their cash cow commodity will clearly make a big dent in their bottom line.

Rio Tinto’s share price has sunk by almost a quarter since the beginning of August, while BHP’s stock has fallen more than 18 per cent this month. 

It is hard to believe it is just a few weeks since BHP was basking in the glow of its biggest first-half profit in almost a decade, and two months since Rio toasted its own record of almost £9billion.

Nowhere has enjoyed the fruits of this boom more than Western Australia, the world’s biggest exporter of the commodity, which posted a record budget surplus earlier this month.

To understand why iron ore prices have fallen, you need to know why they went up in the first place. The surge was driven by insatiable demand from China, which snaffles around three quarters of global iron ore imports. 

Determined to renew its economy after Covid-19, China was clamouring for as much iron ore as possible to build roads, railways and 5G masts.

This demand was coupled with a fall in supply from Brazil, where a combination of Covid and a series of accidents triggered shut-downs at some of its biggest mines. 

More recently China’s infrastructure stimulus has slowed, reducing demand for steel and the iron ore needed to make it. 

But some analysts believe the single biggest reason for the recent iron ore rout is China’s President Xi Jinping’s apparent commitment to reducing carbon emissions.

China is not exactly known for its environmental credentials.

But it has, at least publicly, committed to a target of achieving ‘net zero’ carbon emissions in 2060 – a decade later than many developed economies.

To help achieve this target, Beijing has imposed strict curbs on steel manufacturing, which accounts for around 15 per cent of its carbon emissions. 

It has stipulated that production this year should not surpass 2020 levels. When the communist government wants something, it generally gets its way.

After steel production ramped up in the first half of the year, it has fallen sharply since July.

There is another factor at play – the Beijing Winter Olympics.

Every winter, Chinese authorities introduce steel production restrictions to reduce smog, as excess coal is burnt to heat homes, businesses and factories.

But with the games due to begin on February 4, President Xi is particularly anxious to avoid the image of the world’s top lugers hurtling down the hillside in a thick soup of smoke.

This means restrictions on steel production from Beijing are likely to be more drastic, and last for longer. Some analysts believe this could weigh on iron ore demand until well into next year. 

But before investors become too disillusioned, the iron ore’s decline in value has to be put into perspective. 

A price of just shy of $120 a tonne is still high in historical terms – and almost triple the $40 the price five years ago. 

And iron ore remains a staggeringly profitable business. Rio Tinto’s break-even price for mining the commodity is between $17 and $18 dollars a tonne.

So the recent fall in iron ore prices just means ‘less cream on top’, according to one analyst.

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