How iron ore giants remain viable amid lower prices

Another round of quarterlies has given readers renewed insight into the workings of BHP and Rio Tinto’s mammoth iron ore businesses.

It comes as iron ore prices remain fragile, with seaborne iron ore destined for China trading just above $105 per tonne on Thursday.

This comes as Chinese demand weakens with the country’s property market continuing to falter. Reuters found property investment in China dropped 10 per cent in the first half of 2024 compared with a year earlier.

BHP and Rio Tinto don’t appear to be fazed. BHP enjoyed record iron ore production for another year (259.7 million tonnes) as it aims to surpass 305 million tonnes per annum (Mtpa) of production.

Rio’s quarterly iron ore production (79.5Mt) dropped two per cent from the same quarter last year, but quarterly shipments were two per cent higher (80.3Mt).

Rio’s quarterly coincided with the company getting the green light for its Simandou iron ore project in Guinea, which is set to inject a further 120Mtpa of iron ore production into the market.

These are big numbers, and it’s the sheer economies of scale that enables BHP and Rio to remain viable amid a tumultuous price environment.

To put it into perspective, the FY24 unit cost guidance for BHP’s Western Australian Iron Ore business is between $US17.40–18.90 per tonne, which is significantly lower than Thursday’s trading price.

The sheer size of BHP’s iron ore business insulates it from lower iron ore prices, but the same can’t be said for smaller iron ore producers, which will be more exposed to price declines.

While iron ore demand is set to increase in the years ahead, supply will come with it and Wood Mackenzie believes that while iron ore prices are expected to average $US110 per tonne in 2024, this is predicted to drop to $US100 per tonne in 2025 with a long-term view of $US75 per tonne.

Margins are likely to narrow and iron ore miners will need to limit costs to remain afloat.