Iron ore plunges to US$91.80, small miners facing losses

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Michael Sainsbury

As regular readers will know, Little Red Blog has, for quite some time been unfashionably bearish on both the Chinese economy and the iron ore price.

So it’s with some relief that we can report that both are softening at the sort of rate we had expected but which most, at the start of the year, had not. And in the past couple of months many have come around to our way of thinking.

Friday evening the benchmark iron ore price plunged 4.1% according to Singapore’s The Steel Index, a Platts company, to close at US$91.80. The month to date average is now very close to US$100. Iron ore futures slumped as well, look out below?  Reuters also reports iron ore is set to fall for its sixth straight month

The price is at a level that is now testing the lows of September 2012 when it hit U$87 forcing Fortescue Metals Group in an emergency capital raising. Credit to the company for pulling US$4.5 billion out of a hat – well JP Morgan and Credit Suisse – but there was certainly a sense of denial from the company before the price plunged from US$136 to US$87 in just five months.

It’s fallen almost as quickly this year and once again FMG appears to be in denial.

At a conference on China organsied by The Australian newspaper where the speakers appeared to be almost 100% Australian, FMG chairman Andrew Forrest said he was comfortable with iron ore at US$110. It’s hard to know at this stage whether it will actually see that mark again this year, and if it does LRB suspects it won’t be for too long.

In a widely cited recent report analysts at Goldman Sachs forecast an average price of US$80.

LRB has been struggling for weeks trying to gets its head around FMG’s costs but at these prices the company is certainly a lot less comfortable than it was, whether it is losing money or much further the price has to go before it does is something we hope to be able to tell you in coming days.*

Andrew Forrest is a remarkable man who has achieved something remarkable building FMG into the world’s fourth biggest iron ore miner. It now lags only the traditional big three Vale SA, Rio Tinto and BHP Billiton. All four big miners are ramping up their iron ore production, the key factor in the recent price fall.

Still Andrew Forrest has a blind spot when it comes to China – after all the country’s government did back him into his fortune and he is famous for his regular “China and its government are wonderful” rants, according to a news report. And expressed his utmost confidence that the Chinese property bubble – the sector consumes at least 60% of China’s steel – is not popping. He should listen a little harder.

“This country came out of political purgatory with no money and just the shirt off their backs and set their people free,”Forrest said.

“They are hard working, intelligent and determined to raise their children’s living standards more than most countries … 400 million people still have to be urbanised.”

*The comments on FMG’s costs have been amended from a previous version of this story pending clarification from the company. FMG’s 2012 capital raising figure has also been amended to reflect the US$ amount.