Citi lowers iron and coal forecasts, but costs also falling
New research from Citi shows that declining production costs are offsetting falling commodity prices, but with Brazil as the biggest beneficiary.
Global banking giant Citi has cut its forecasts for iron ore further, from $US65 a tonne to $US58 this year and $US62 next year.
It has also slashed thermal and coking coal price expectations to $US55 and $US113 this year, and only a modest recovery next.
The bank's analysts say a key reason that they have lowered their forecasts is the dramatic reduction in costs enjoyed by most resources companies over the period that commodity prices have been falling.
This means there will be less short term pressure on some marginal producers to cut production or cease operations altogether.
A 55 per cent slide in the price of fuel for ships has seen a 36 per cent decline in the cost of shipping iron ore from Australia to China.
That, combined with a solid fall for the Australian dollar, means that local miners now average a $US56 a tonne cost of production for iron ore, with the two biggest miners well below the average and some of the smaller miners considerably above it.
In mid-December, UBS estimated that Rio Tinto had the lowest breakeven point at $US35 a tonne, with BHP Billiton at $US37 and Fortescue at $US60.
The bad news for Australia's miners is that Brazil's costs have come down even further, due to an even bigger currency depreciation and larger 48 per cent savings on shipping costs given the longer distance.
Citi's research estimates that Australia's major iron ore rival now averages a lower $US53 a tonne production cost, mostly benefitting that country's major player Vale.
The big losers, however, are Chinese domestic iron ore miners which have neither benefitted greatly from lower shipping costs nor seen significant currency depreciation.
China's average cost of production at $US66 a tonne is higher than any of the major exporting nations.
Coal producers have seen similar benefits, although Australian miners have again seen less benefit than others, in this case Russia (which has had a massive currency devaluation) and Indonesia.
Citi estimates that Russian producers now have a $US20 per tonne edge over their Australian rivals.
The good news, both for commodity demand and for the global economy more generally, is that a $US60 a barrel fall in oil prices - roughly what we are seeing currently - represents a $2 trillion stimulus to consumers.
According to International Monetary Fund estimates, that could boost global growth by 0.7 percentage points this year.
