Lower production costs to offset plunging prices, mine closures, say experts

The world's biggest iron ore producers are targeting record shipments as lower output costs offset plunging prices and less competitive mines shut down in China.

Vale SA, Rio Tinto Group, BHP Billiton Ltd and Fortescue Metals Group Ltd are still making money even after prices of the steel-making ingredient dropped 36 percent since December to their lowest level since 2009. The companies are betting that higher-cost producers will be squeezed out of the market.

Higher inflows from Brazil, Australia may trigger iron ore price declines

Rio Tinto to boost iron ore capacity

Slowing steel demand in China, which buys 67 percent of the seaborne iron ore supply, and new production capacity in Australia and Brazil have led to a global surplus that Goldman Sachs Group Inc forecasts will more than double to 175 million metric tons in 2015. As mines in China close, the four companies are set to boost their share of the seaborne supply to almost 70 percent, according to CLSA Ltd, a broker and investment group.

"You've got the four major producers with very strong, world-class, lowest-cost production," said Daniel Kang, an analyst at JPMorgan Chase & Co in Hong Kong. "Even at current prices or lower, the economics of their expansion projects are very compelling."

Ore with 62 percent iron content delivered to the Chinese port of Qingdao declined to $86.09 a ton on Wednesday, its lowest level since October 2009, according to Metal Bulletin Ltd. Prices are 55 percent below the record $191.70 reached in February 2011.

The slump has a way to go before the biggest producers are in the red. Rio Tinto has the lowest break-even cost at $42. BHP's is $51, and Vale is at $60 in terms of ore landed in China with 62 percent content, according to UBS AG estimates.

Rio Tinto, the top supplier after Vale, plans to boost output to more than 330 million tons in 2015 after an 11 percent advance to 295 million tons this year, the company says. Vale will raise production by 8.4 percent to 348 million tons in 2015. BHP sees an 8.9 percent increase from its Western Australian mines in the year from July 1, while Fortescue may boost shipments by 25 percent.

Even smaller companies such as Perth, Australia-based Atlas Iron Ltd are predicting record shipments this year. Atlas, with a break-even cost in the mid-to-lower $80s a ton, predicts an increase of at least 12 percent in exports from its mines in the mineral-rich Pilbara region starting July 1, according to Atlas' managing director, Ken Brinsden.

While profit margins are being squeezed, higher-cost companies will have to cut output first, he said in a conference call last week. Atlas will seek to create "more headroom" over time by cutting expenditures, Brinsden said.