The Motley Fool

Predictions of US$80 iron ore are premature

You’d think Rio Tinto Limited (ASX: RIO) boss Sam Walsh would be worried.

But amazingly, he has shrugged off the recent 20% plus fall in the iron ore price. Speaking to the Australian Financial Review (AFR), Mr Walsh says no one should be surprised by China shutting down some of its older steel mills and reducing steel capacity.

Mr Walsh says China indicated six-months ago that it was going to rationalise its steel industry, and that we are now seeing the effects of that. Dangerous levels of pollution have forced many Chinese cities to consider drastic action, such as closing down heavy polluting older steel mills.

Mr Walsh says Rio supplies the blue chip steel mills, suggesting the big miner would not be affected by these closures.

Investment banks have taken advantage of the big fall in the iron ore price to extrapolate further falls. Both Goldman Sachs says it is predicting US$80 a tonne on average in 2015, while Citi is predicting US&90 a tonne in 2015 and US$80 a tonne in 2016.

But you can bet your bottom dollar that both investment banks will have changed their forecasts for next year and beyond by the end of this year. Unfortunately, the market seems to be assuming a price of US$80 a tonne is immanent. Short term volatility is possible, but even the investment banks don’t expect the price to be that low this calendar year.

As the lowest cost iron ore producer, Rio Tinto is likely to be the last iron ore miner to feel the pain should the iron ore price drop as low or lower than US$80 a tonne. According to UBS estimates, Rio Tinto’s breakeven price is US$43 a tonne.

BHP Billiton (ASX: BHP) follows close behind with costs of US$45 a tonne, while Fortescue Metals Group (ASX: FMG), BC Iron Limited (ASX: BCI) and Atlas Iron Limited (ASX: AGO) ranging from US$70 a tonne to US$82 a tonne.

Foolish takeaway

If Sam Walsh isn’t worried about the iron ore price, perhaps investors shouldn’t be either.

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