(Repeats with no changes to text) - Clyde Russell is a Reuters columnist. The views expressed arehis own.-
By Clyde Russell
LAUNCESTON, Australia, Sept 24 (Reuters) - The recent debateover iron ore has tended to be whether the three mining giantswho dominate seaborne supply will win their massive bet thatthey can drive high-cost producers out of the market.
But a more relevant question is whether they will have thetime to achieve their aims.
The Anglo-Australian pair of Rio Tinto and BHPBilliton, as well as Brazil's Vale haveflooded the market with their low-cost iron ore, with supplyfrom Western Australia ramping up dramatically in the past year.
This has led to a collapse in the Asian spot price<.IO62-CNI=SI> to a five-year low of $79.40 a tonne on Tuesday,down 41 percent from the end of last year and 58 percent fromthe record $191.90 a tonne reached in February 2011.
The main question for the big three is not whether they candrive higher-cost competitors to the wall, but how long theirown investors will tolerate the lower earnings as a result ofthe weak iron ore price.
While the chief executives of the big three haven't exactlysaid so in public, they are clearly hoping for a relativelyshort war and a quick victory, after which iron ore prices willonce again rise and stabilise at a higher level.
Again, that price level hasn't been clearly spelt out, but Iwould imagine the big three have a number in mind somewhereabove $90 a tonne, with $110 likely viewed as a ceiling.
The Australian government's commodity forecaster, the Bureauof Resource and Energy Economics, lowered its 2015 iron oreprice forecast to $92.40 a tonne from $94.60 previously, whilealso lifting its forecast for Australian exports to 735.3million tonnes in the 2014-15 fiscal year from 720.7 million.
This forecast is broadly in line with several otherrespected analysts, with the consensus revolving around a returnto levels above $90 a tonne by the end of this year or early in2015 as high-priced supply leaves the market.
If this is the case, Rio Tinto's Sam Walsh and BHP's AndrewMackenzie probably have not too much to worry about.
A scenario in which iron ore prices recover and stabilisearound $90 a tonne will allow them to make significant profits,and would justify the billions of dollars they have spent toramp up supply from their mines in Western Australia.
BEST LAID PLANS MAY GO AMISS
However, what happens in an alternative scenario, wherehigh-cost supply, particularly Chinese domestic output, doesn'tleave the market as fast as expected.
And to make matters worse, what happens when more low-costoutput from mines not operated by the big three also comes online.
Dealing with the first scenario, it certainly appears thatsome Chinese domestic output has left the market, but probablynot in the volumes that Rio and BHP would like to see.
Official statistics suggest that Chinese iron ore outputactually gained 8.5 percent in the first eight months of theyear, over the same period in 2013.
This raw figure doesn't account for the declining grade ofChinese output, but even so, it hardly speaks of a collapse inmine production.
More significantly, the share of imported ore being used byChinese steel mills has risen, reaching 88 percent this monthfrom 75 percent at the start of the year, according toconsultancy MySteel.
That does speak to some replacement of domestic iron ore byimports, but the question remains as to whether this is enoughfor Rio and BHP.
A large part of China's iron ore industry is controlled bythe large, state-owned steel companies, and as such, is highlyunlikely to shut down, even if it does become loss-making.
The top priority for Chinese state companies is generallyjobs, and there are numerous examples of unprofitableenterprises continuing to operate for social reasons. Just lookat the aluminium sector for an example.
Rio Tinto's Walsh told Reuters on Sept. 9 that he expects125 million tonnes of iron ore capacity to leave the market in2014, with about 85 million tonnes already cut.
Those closures have been concentrated in minor producerssuch as Iran, South Africa and Indonesia, as well as somesmaller operators in Australia.
About 132 million new tonnes of supply is expected to comeonline in 2014, most of it from the big three.
The problem is not so much this year, but in the comingyears, with 393 million tonnes of new capacity expected in thenext few years, and this just from the top five producers.
It's likely that this will swamp any increase in demand,meaning that the major, low-cost producers are counting ondestroying everybody in the seaborne trade and also shuttingdown a large chunk of Chinese output.
If all the new capacity is brought to market, it'sincreasingly hard to see how the price can rally back to $90 atonne and stay there.
This creates a problem for Rio Tinto and BHP, who havebasically promised investors that they will be returning cash,having imposed cost cuts and slashed capital spending.
BHP said in its latest report that every $1 decline in theiron ore price wipes $135 million off net profit after tax.
It doesn't take long to work out that BHP, and itscompetitors, will struggle to deliver enough free cash flow toreward investors if the iron ore price remains depressed formuch longer.
The equity investors who led a charge to force the resourcegiants to stop spending on building new mines in 2012 werelicking their lips in anticipation of the rewards of thoseefforts.
A prolonged iron ore price war will dash those hopes, andshareholders are likely to pressure Rio Tinto and BHP to do morethan swamp the market with cheap iron ore.
Disclosure: At the time of publication Clyde Russell ownedshares in BHP Billiton and Rio Tinto as an investor in a fund. (Editing by Himani Sarkar)
