Arrium Limited (ASX: ARI) received just US$48 (A$66) a tonne for its iron ore shipped during the September quarter – leaving the junior iron ore miner and steel maker facing major headaches.
The company says its total cash cost was $57.4 per tonne, and it was targeting a cash breakeven price of US$47 per tonne.
One of the big problems Arrium faces is that its ore is lower grade than the 62% benchmark iron ore price, so the company receives a discounted price. The average benchmark price was US$55 per tonne for the quarter – Arrium received around 87% of the benchmark price.
Steelmakers favour higher quality ore, and there are many miners producing lower-grade ore, including Fortescue Metals Group Limited (ASX: FMG), which has led to a surplus of iron ore.
Iron ore prices have continued to fall in recent days, including a 4-day losing streak. Benchmark iron ore was at US$52.60 per tonne and fell more than 5% last week.
Arrium has already been forced to mothball its Southern Iron operations in January 2015 and take $1.1 billion in writedowns on the mine, which slashed production by 4 million tonnes a year.
While the company continues to target lower production costs, the iron ore price could continue falling, leaving Arrium behind the eight-ball. It's something we warned about as far as May 2012, suggesting Arrium's move into iron ore was ill-fated.
Some of Australia's junior iron ore miners have gone to astonishing lengths to slash their production costs, with Atlas Iron Limited (ASX: AGO) signing profit sharing agreements with its mining and transport contractors in an effort to become cash flow positive.
BC Iron Limited (ASX: BCI) reported an underlying loss of $18.2 million after being unable to lower its all-in production costs sufficiently, and this quarter's report should make for interesting reading.
Foolish takeaway
The key to iron ore prices will be moves in China's steel production, as well as the supply of the commodity. As we illustrated back in May, large miners are rapidly increasing production into an already over-supplied market – putting downward pressure on the commodity price.
