Macquarie Research reckons China's domestic iron ore costs will support overall iron ore market
With marginal Chinese domestic iron ore firmly back in place at the top end of the global cost curve, gaining insight into the cost structure of this section of the market is vital to understanding how the iron ore market will be priced over the coming years.
Macquarie said “In our view, there is currently cost support for iron ore at USD 120 per tonne. In this report we look at the inflationary pressures on domestic iron ore mining and what this means for cost support going forward.”
A clamp down on unreported mining activity resulted in a major one off increase in costs at the top end of the cost curve between 2008 and 2010. From here we believe more structural issues such as rising labour costs and deteriorating grades will drive cost inflation going forward.
Inflation is likely to be most keenly felt at the higher end of the cost curve, where lower grades mean a higher ore to concentrate ratio which in turn means higher mining, labour, transportation and maintenance costs. The value chain at the higher end of the curve can also be highly fragmented and more moving parts means it is more difficult to coordinate cost saving measures.
While domestic mining costs are pushing up in RMB terms, one of the key drivers for rising support prices for seaborne material is the USD, RMB exchange rate. While we expect mining costs to increase 5% to 6% in RMB terms over the next 5 years, RMB appreciation means the inflation rate could rise to 10% to 12% in USD terms.
The continued dependence on Chinese domestic iron ore and the impact of inflation in the sector will likely maintain the steep gradient of the 4th quartile of the cost curve which makes iron ore highly attractive and set a high cost support floor under prices. We expect average iron ore prices to trade around the USD 130 per tonne to 150 per tonne CFR China range out to at least 2013 and above USD 100 per tonne CFR China out into the latter half of this decade.
(Sourced from www.mineweb.com)
