Corporate Rationalization and Iron Ore Miners: Tough Times

The global iron ore mining industry is undergoing a major rationalization, which emphasizes the importance of corporate flexibility in the face of changing market conditions. Iron ore industry prices have fallen from over $130 per metric ton (CFR Tianjin Port prices) at year-end 2013, hitting their lowest level ($89) in almost two years in June. Numerous analysts expect that prices will stay below $100 for the rest of 2014 and possibly 2015, as well. A major driver of this price plunge is oversupply, partially caused by the ramping up of production by the major multinational corporations (mainly Australian and Brazilian) that dominate the business.

These companies also are actively rationalizing their operations, a process that entails finding greater cost efficiencies, selling off non-core assets, and trimming headcount. What is happening in companies like Anglo American, BHP Billiton and Vale, is having an impact on China, the world’s largest user of iron ore and the destination of two-thirds of seaborne iron ore. While lower iron ore prices help Chinese steel producers, Chinese miners will struggle to generate profits and justify production if prices hold below $100 per metric ton. According to the China Metallurgical Mining Enterprise Association, 20-30 per cent of Chinese iron ore mines have closed. More are set to follow. The restructuring of the global iron ore mining sector should provide the opportunity for Chinese companies to rationalize, but the decision to do so requires local players (and the Chinese government) to understand the long-term benefits of pursuing greater cost-efficiencies. Otherwise, Chinese mining companies face a bleak future, with survival contingent on state largesse. Considering China’s place in the global economy as a key industrial workshop, iron ore demand is not likely go away, but to keep some degree of market share in Chinese hands, Chinese miners must reform.