The Australian reported that construction of a new rail line through Western Australia's resource rich Pilbara region could drive down iron ore prices and force out of business the very mines the network would unlock, an exhaustive analysis of the iron ore industry has found.
UBS analyst Mr Glyn Lawcock said that the rail lines being considered by the likes of Gina Rinehart's Roy Hill and infrastructure group QR National could add significant new supplies to the iron ore market at the same time as heavyweights Rio Tinto, BHP Billiton and Fortescue Metals were expanding their production, hurting iron ore prices and potentially rendering new projects uneconomic.
Mrs Rinehart's Hancock Prospecting is exploring the development of a dedicated rail network for her proposed Roy Hill iron ore mine, while QR National has teamed up with Atlas Iron and Hong Kong-based Brockman Mining (formerly Wah Nam Holdings) to investigate another rail line.
In a research note released yesterday, Mr Lawcock said he did not believe two new rail lines would be economic, and one new rail line would be economic only if it serviced not just Roy Hill but also Atlas and Brockman.
But he said that the new production that would be unlocked by a new rail line, coupled with the ongoing expansion efforts of incumbent producers Rio Tinto, BHP and Fortescue, could force down iron ore prices.
He added that "The additional potential supply that Atlas, Mrs Hancock and Mr Wah Nam could provide is a negative to the iron ore trade and this ultimately leads us to a view that developing rail infrastructure could in fact make these aspiring projects less economic due to lower margins. These new entrants could effectively become the top of the cost curve which effectively sees these new entrants generate a zero margin."
UBS is predicting a long term iron ore price of USD 72 a tonne at a US dollar exchange rate of 80c, in line with Mr Lawcock's forecast operating costs for the new entrants.
Mr Ken Brinsden MD of Atlas Iron stood by the company's efforts to explore a rail partnership with QR.
Mr Brinsden said that "Atlas Iron has always had a red hot go at innovating as a way to continue growing our business."