Are investors encouraging short-termism in iron ore

From the big miners' point of view their low cash costs mean they will make money until the price of ore falls below USD 50 a tonne. It is the smaller miners that will suffer as the price falls

July 22, 2013 / 10:01 IST

Judging by investor reactions to the miners' production reports last week you would think that no one is losing much sleep over the end of the commodities boom. Yet if Australia's forecasters are correct, the iron ore price could fall to USD 90 a tonne within the next five years, from about USD 125/t today. So, as investors reward miners for recent boosts to production, are they at risk of encouraging short-termism?

BHP Billiton raised its production of iron ore by 17 percent from a year earlier in the last quarter, while Rio Tinto bumped its production up by a quarter in the first half. While Anglo American's production report was less impressive, investors still pushed up shares in the miners by between 3 and 4 percent last week.

The expectation was that heavy rains in Western Australia would have hurt output. All that added to the gain in shares since mid-June when the price of iron ore recovered from recent lows as China's steel mills began restocking after clearing out inventories.

From the big miners' point of view their low cash costs mean they will make money until the price of ore falls below USD 50 a tonne. It is the smaller miners that will suffer as the price falls. Thus Vale, Rio, BHP and Fortescue, which hold 70 percent of the seaborne iron ore market, will only expand their share further.

And so long as big miners are producing like mad, they cannot be accused of driving prices down. If prices are going to fall anyway, it makes more sense to get ore out of the ground now and sell it.The fall in share prices since 2011 has left miners trading close to pre-crisis lows.