With iron ore prices around US$42 a tonne, Gina Rinehart's Roy Hill mine will be lucky to break even, according to a partner in the mine, Korean giant steelmaker POSCO.
Posco says the Roy Hill iron ore mine needs prices at least in the low US$40 a tonne range to make a profit. The steelmaker owns 12.5% of the mine, with Ms Rinehart's Hancock Prospecting the lion's share of 70%. Japanese company Marubeni and China Steel Corporation hold the remainder.
But it's early days for the Roy Hill mine, which only shipped its first ore in December 2015. Once the mine is operating at full capacity of around 55 million tonnes each year, costs are expected to drop into the US$30 a tonne range. It is expected to take up to 18 months from the first production to ramp up to full capacity suggesting mid-2017.
POSCO says Roy Hill will make a profit at the price of around US$42 a tonne, with most of its ore sold under long-term contracts and around 10% sold at spot prices.
The spot price of iron ore increased overnight to US$43.02 a tonne according to Metal Bulletin.
But global steel production is falling and was down 3% in 2015 compared to 2014, with each month showing a steady decline, according to the World Steel Association. The trend suggests even further declines in 2016 – the complete opposite of the expectations of the giant resources companies BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO). Both miners have been forecasting steadily growing steel production – and, therefore, demand for iron ore.
Many Chinese steelmakers are operating at a loss, and further declines in steel production are likely.
That spells doom for the iron ore price, which has so far held up relatively well, since falling below US$40 a tonne in December 2015. The question is not if but when the spot price declines and how long it will stay low for.
Foolish takeaway
Simple economics says that falling demand and rising supply can only equal a lower price for iron ore. Roy Hill's owners may want to start cutting costs now – US$30 a tonne may be too high – and before they start making a loss.
