WA iron ore miners rake in more profit than the banks, but Citi warns that is at risk with price seesawing

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WA iron ore miners rake in more profit than the banks, but Citi warns that is at risk with price seesawing

The oversized importance of iron ore to Australia’s economy has been reinforced by new analysis amid a backdrop of the steelmaking commodity tumbling back below $US100 per tonne.

Citi estimates that BHP, Rio Tinto and Fortescue generated $36 billion of economic profit during the 2024 financial year just from iron ore mining alone. Virtually all of the trio’s iron ore output comes from the Pilbara.

This figure equates to about 90 per cent of the economic profits of Australia’s entire mining sector and is $5b higher than the combined net profit Australia’s big four banks pulled in for FY2024.

Economic profit, unlike net profit, includes a calculation of implicit expenses — like the opportunity cost associated with dedicating resources to an iron ore project instead of mining a different commodity.

The ********* investment giant warned that the significant economic contribution delivered by iron ore is at risk.

“There ******** uncertainty around long-term iron ore demand with expected decline in China steel consumption, and India, although growing, is likely to remain an iron ore net exporter in the next 5 years,” Citi stated.

“Although there is near-term iron cost curve support, we see longer-term downside risk as the curve can reshape considerably on materially lower China demand.

“Iron ore is a key driver of both profit and WA state and Federal revenues so its broader importance should not be underestimated.”

The iron ore spot price averaged $US117.83 for FY2024. It currently sits at $US93.65/t after climbing back above $US100/t last week.

This latest drop followed bleaker-than-expected property data out of China on Saturday.

The value of new-home sales from the 100 biggest real estate companies fell about 26.8 per cent from a year earlier to 251 billion yuan ($US35.4 billion), faster than the 19.7 per cent decline in July.

China’s property market is a major driver of steel demand. Iron ore is a key input to make steel, so the commodity’s price is heavily intertwined with steel demand.

Since hitting peaks of $US233/t in May 2021 the value of iron ore has dipped below $US100/t eight times, but so far has not stayed beneath the century threshold for long.

Citi thinks the days of the iron ore price resilience are numbered and expects prices to drop to $US85/t in the near term.

The WA Budget pencils in an average price of just $US75/t for the current financial year, but while a price of $US85/t will not create a budget ****** ***** the effects are significant.

For each $US1 the average annual iron ore price beats the $US75/t assumption in the Budget the WA government collects an additional $94 million in royalties.

This means a swing of even $US11 wipes away more than $1 billion from the State’s coffers.

Citi says out of the iron ore trio BHP is best placed to weather a price downturn.

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