Iron ore is seen at Rio Tinto’s West Angelas mine in the Pilbara, Australia. The mining state of Western Australia deferred the much-needed royalties as iron ore prices plummet.
Reuters/Sydney
A half-decade after insulating Australia from the worst of the global financial crisis, the mining state of Western Australia is for the first time being forced to defer much-needed royalties as iron ore prices plummet.
Western Australia – five times the size of Texas – counts on royalties from mining companies for tens of thousands of jobs and helped transform the capital Perth into a global hub business hub perched on the Indian Ocean at Asia’s doorstep.
But the boom-to-bust in iron ore caused by oversupply and waning demand growth in China has put prices in free fall over the past year, racking up losses for all but the biggest producers.
BC Iron yesterday became the first miner granted a 50% deferral on royalties, showing the depth of the pain from sliding ore prices as miners scramble to find cost savings wherever they can.
“This is not a handout, it is temporary relief for mining companies which are actively adjusting their operations,” said Bill Marmion, the state’s minister for mines.
As the financial crisis deepened, a mining frenzy spurred by a voracious appetite among Chinese steel mills for rich Australian ores had miners rushing to fill orders, drawing skilled and unskilled workers to the state from around Australia and the world.
Multinationals such as BHP Billiton and Rio Tinto spent billions of dollars digging mines and crisscrossing the arid outback known as the Pilbara with rail hauling lines.
These same companies are now being blamed for still expanding while miscalculating China’s need for Australian ore, and threatening the future of smaller miners such as BC Iron that followed in their wake.
The state’s political leader Colin Barnett in a radio interview labelled the actions of the big producers flooding the market with iron ore “one of the dumbest corporate plays.”
Rio Tinto chief executive Sam Walsh has called the strategy one of “survival of the fittest.”
Facing the prospect of mines shutting down, Barnett in December told miners producing less than 20mn tonnes annually – called minnows – they could be eligible for a 50% deferral on the royalties they pay. The state also froze port fees and tariffs at the main export terminals.
Rio Tinto, which is not eligible for the rebate because of its size, expects some 85mn tonnes of iron ore capacity to be taken out of the world market in 2015 because the price slump has made it too costly to produce - nearly a tenth of global trade.
Chinese mines – among the least efficient – will absorb most of the losses. But analysts have warned small Australian miners, such as BC Iron and Atlas Iron, were operating close to break-even and will need to reduce overheads if prices continue to drop.
“The amount, A$8-A$12mn ($6.11-$9.16mn), in royalty deferrals for us is not a great sum, but given the climate we are operating in, every bit will help,” BC Iron Chief Executive Morgan Ball told Reuters by telephone.
It is also of little consequence given the plunge in iron ore prices threatens to wipe more than A$3bn in mineral royalties from the state’s budget, according to analysts.
Iron ore stood at $51 a tonne – the weakest since late 2008 and could drop as low as $47, forecasts Westpac Bank senior economist Justin Smirk.
