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Low oil price a lifeline for small iron miners

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Efforts by big iron ore producers to put smaller, higher-cost rivals out of business by oversupplying the market are not paying off yet, and it's mainly due to price falls in another commodity - oil.

[LONDON] Efforts by big iron ore producers to put smaller, higher-cost rivals out of business by oversupplying the market are not paying off yet, and it's mainly due to price falls in another commodity - oil.

The ploy by Australian majors Rio Tinto and BHP Billiton has pushed iron ore prices to their lowest in more than five years.

That should have squeezed out smaller producers, helping the majors to increase market share and the price to rebound.

But a recent slump in freight rates, largely due to a collapse in bunker fuel prices, is saving the minnows as much as US$16 per tonne, almost a quarter of the current iron price.

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This, coupled with the benefits of lower diesel prices at the mines and falls in emerging currencies against the dollar, is helping them resist at least a little longer.

"This is certainly helping the small producers. They are not feeling as much of the impact of the fall in iron ore prices as you may have thought," said Macquarie head of global commodities research Colin Hamilton.

"The price of iron ore has to work harder to get rid of these suppliers." With crude having fallen the best part of 60 per cent since June, the drop in bunker fuel prices is the single biggest shift in terms of cost reduction, according to a spokesman for global miner Anglo American.

The firm says its operations in South Africa and Brazil have benefited, a reflection of freight prices to China, which have declined most - up to US$16 per tonne - for shipments from furthest away.

Brazilian miners are faring the best, according to Jeffrey Landsberg, managing director of US based Commodore Research & Consultancy.

Brazil's Vale, one of the majors, is now the world's lowest-cost supplier to China, undercutting both Rio and BHP, according to Bernstein Research analyst Paul Gait.

Smaller Brazilian miners are benefiting too.

Small exporters in the mining state of Minas Gerais would not be breaking even at the current iron ore price of around US$68 were freight rates the same as last year, data from researchers Wood Mackenzie shows.

Discounting larger producers Vale SA and steelmaker CSN, average production costs in Minas Gerais are just below $50 per tonne, according to the consultancy.

Oil prices accounted for about 60 per cent of total freight costs, said Khalid Hashim, managing director of Precious Shipping, one of Thailand's largest dry cargo owners.

But the freight price has also shrunk due to a structural oversupply and slower demand growth, which are likely to persist in the medium term.

Even so, marginal producers are unlikely to resist the pressure from the big players for much longer.

Rio Tinto plans to add 70 million tonnes of supply later this year, of which demand should accommodate only around 20 million, according to Macquarie.

"The challenge is that the market still doesn't need this extra supply so the smaller miners will be under pressure again," Mr Hamilton said.

REUTERS

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