Photographer: Andrey Rudakov/Bloomberg

Iron Giants Target Used Gyms, Generic Parts to Slice Costs

  • Top miners seen with limited scope to make major new savings
  • Rising currencies, freight rates to counter cost cuts: CRU

From buying second-hand gym equipment to generic replacement parts, the world’s biggest iron ore producers are using increased ingenuity to keep on cutting costs at their mines -- but it’s getting tougher.

Even as Fortescue Metals Group Ltd. sources more parts from China and automates trucks and drills, its targeted reduction in full-year cash costs may be less than a quarter of the drop in 2014, according to company data. The top producers, threatened with declines in iron ore earnings from next year, face increased margin pressure as the pace of cost cutting slows, just as prices are forecast to drop.

Limited opportunities to squeeze further savings from operations, together with forecasts for higher oil prices and stronger operating currencies, means costs are more likely to increase, according to Global Mining Research Ltd. Banks including UBS Group AG and Citigroup Inc. anticipate a price slump next year as low-cost supply surges after a rebound this year on China demand.

“For the next two or three years, it is inevitable” rising costs will add to a squeeze on producers’ margins, Adrian Doyle, a Sydney-based senior consultant on iron ore costs at researcher CRU Group, said by phone. “We are in a structurally oversupplied market.”

Rio Tinto Group, the world’s second-biggest exporter, can expect earnings at its iron ore unit to drop by about $3 billion next year, according to estimates from Goldman Sachs Group Inc. , while Deutsche Bank AG sees a $1.4 billion decline. Rio, which earlier axed hot pies from mine site menus to cut costs, is continuing to target even small gains, for example, sourcing used gym equipment for its facilities at a Australian mine.

Major savings from cuts to staff and capital expenditure, or by raising volumes to fully utilize capacity along railroads and at ports, have been largely achieved, according to David Radclyffe, Sydney-based managing director at Global Mining Research. Rio is now looking to about 1,000 initiatives from staff to win new savings, the producer’s top iron ore executive Chris Salisbury said in an internal memo this month.

‘Heavy Lifting’

“The majority of the heavy lifting has been done, and you can already see it in the numbers,” Radclyffe said. “They have done a fantastic job at taking costs out, but obviously it gets harder and harder, and I don’t think that we see any scope for much more.”

BHP Billiton Ltd., which reduced its iron ore cash costs 19 percent in fiscal 2016, sees a slower pace of savings in the current year, forecasting a reduction of 7 percent to $14 a ton. Rio cut its cash costs, which exclude freight and royalty charges, to $14.30 in the first six months of 2016, 12 percent lower than a year earlier.

Fortescue is targeting more than 10 areas across mining, processing and procurement as it seeks to shave a further $3 a wet ton from cash costs, it said Tuesday in a presentation. The producer sees potential for savings by sourcing more goods from China, looking beyond original manufacturers for equipment components and by introducing remote operation of processing facilities.

Even at its current break-even price of about $28 to $30 a ton, Fortescue would continue to generate good margins, Chief Executive Officer Nev Power said last week in a phone interview. “We do have a cost curve that supports an iron ore price which provides really good margins for all of us at the bottom of the supply curve,” he said Thursday.

The Perth-based company, whose profits are forecast to drop about 47 percent in fiscal 2018, is targeting cash costs of between $12 and $13 a ton by June 30. Vale SA, the top exporter, had cash costs of about $12.75 in the first half and is targeting new savings as it begins output from its lower cost, $14 billion S11D project in northern Brazil.

CRU sees iron ore averaging about $49 a ton next year and $48 in 2018, before rebounding in 2019 as more higher-cost Chinese production is shuttered. Benchmark iron ore has averaged about $54 a ton this year as the material has advanced by more than 42 percent, according to Metal Bulletin Ltd. data. It surged 4.5 percent to $61.96 a dry metric ton on Tuesday.

Aside from Vale, the biggest producers “might be able to eke out a dollar or two here and there, but if we look at forecast exchange rates and freight rates, they are going to basically counteract those reductions,” CRU’s Doyle said.

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