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The Australian share market has closed slightly lower as a weaker resources sector and low consumer confidence weighed on sentiment.

Lonsec senior client adviser Michael Heffernan said uninspiring leads from overseas markets, lower iron ore prices affecting mining stocks, and two surveys showing flat consumer confidence had contributed to the modest drop.

Two separate surveys show that consumer confidence remains in the doldrums, with households worrying about the impact of the May budget's spending cuts on their finances.

"Hence the market sort of did nothing today," Mr Heffernan said.

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He said investors initially reacted negatively to a profit downgrade by travel agency Flight Centre but then reversed direction after concluding that the downgrade was not so bad after all.

In the resources sector, global miner BHP Billiton fell 34 cents to $35.94, Rio Tinto was 24 cents lower at $59.40, and Fortescue Metals shed nine cents to $4.54.

West Australian iron ore miner Aquila Resources was 12 cents higher at $3.61 as Mineral Resources appeared to be positioning for a bidding war for Aquila.

Engineering firm Downer EDI plunged 59 cents, or 11.15 per cent, to $4.70 after BHP Billiton cancelled a $360 million mining services contract with Downer at a Queensland coal mine.

The major banks were mixed. National Australia Bank scraped off one cent to $33.63, Commonwealth Bank backtracked 22 cents to $82.20, Westpac gained 12 cents to $34.75, and ANZ added 14 cents to $33.90.

In the retail sector, travel agency Flight Centre was 53 cents higher at $46.43 despite cutting it profit forecast.

KEY FACTS

* On Wednesday, the benchmark S&P/ASX200 index was down 15.7 points, or 0.29 per cent, at 5,454.0 points.

* The broader All Ordinaries index was down 16 points, or 0.29 per cent, at 5,432.5 points.

* The June share price index futures contract was 18 points lower at 5,459 points, with 20,469 contracts traded.

* National turnover was 1.24 billion securities worth $3.17 billion.

* The price of gold in Sydney at 1700 AEST was $US1,262.70 per fine ounce, up $US7.40 on Tuesday's price of $US1,254.80.

iron ore price

China’s key economic planning agency has provided a sobering demand-side perspective on the outlook for the iron ore industry. There is no near-term relief in sight.

With iron prices edging below $US97 a tonne overnight -- its lowest level in 20 months -- China’s National Development and Reform Commission said yesterday that prices were unlikely to rise over the next three months because of a combination of high levels of inventory at ports and increasing supply.

While there are some in the sector who have seen the sharp decline in the price as a temporary response to China’s crackdown on its shadow banking sector and a consequent liquidity squeeze that has impacted commodity-based financing, the NDRC’s views are founded in the industry’s fundamentals.

“As some big miners are running new capacity, iron ore delivery would grow steadily over the next two to three months while port inventories will continue standing at high levels and steel demand is slowing, so iron ore prices will find it difficult to rise,” it said. Inventories at China’s ports are a record 113.3 million tonnes.

The NDRC expects global iron ore production ex-China to increase by about 130m tonnes this year but the growth in China’s demand for iron ore to slow to an annual rate of about 3-4 per cent. Last year China’s demand for iron ore grew by about 10 per cent.

The commission expects the lower prices to impact China’s domestic iron ore producers, whose costs of production range from $US75 to $US145 a tonne against a global average of just under $US55 a tonne. However, the impact of the price reductions -- now 28 per cent since the start of the year -- will obviously be felt in the profitability of the major seaborne iron ore producers.

The flipside of what would be a painful experience for iron ore producers and their home economies, of course, would be a windfall for China’s steel producers. The market-related pricing adopted by seaborne producers during the boom would flow through quickly and positively to their input costs.

While the NDRC’s comments relate to the near-term outlook (Iron ore miners brace for a structural shift, May 21), the continuing expansion of supply occurring in the sector is rapidly pushing the industry into a position of structural surplus, which could be reached as early as the second half of this year. There are some who suspect that point has already been reached.

The ramp-up of production occurring even as the price has fallen is quite dramatic. Brazil’s Vale, which produced just over 300 million tonnes of ore last year, has a planned expansion to 450 million tonnes by 2018.

Rio Tinto produced about 250 million tonnes last year and will hit an annualised rate of about 290 million tonnes by the middle of this year. It is on a trajectory to reach a rate of 360 mtpa by the middle of next year.

BHP Billiton, which is targeting output of 217 mtpa this financial year, is on a pathway to between 260 mtpa to 270 mtpa.

If the NDRC is right and China’s demand growth slows to that 3-4 per cent level, the extent of the surplus in iron ore and the impact of that over-hang of supply could be even more significant and lasting than even the more pessimistic of analysts have forecast

iron ore news

BlackRock’s Hambro Sees Mining Stocks Rebounding After Cost Cuts

                           By Chanyaporn Chanjaroen  Mar 28, 2014 4:24 PM GMT+0800  

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Mining companies have weathered a trough and begun renewing interest among investors after cost reductions enhanced valuations, said Evy Hambro, who runs the $7.3 billion World Mining Fund at BlackRock Inc.

Mining stocks probably reached the bottom around June, following three consecutive years of being bested by the broader equity market, Hambro said today at a media briefing in Singapore. New managements at major mining companies including BHP Billiton Ltd., Rio Tinto Group, Anglo American Plc and Glencore Xstrata Plc have improved performances, he said.

“It’s pretty clear we are seeing a base forming in the market,” said Hambro, who is overweight on copper and iron ore and is increasing his holdings in nickel. “We had an amazing set of results in February when the companies outperformed relative to expectations.”

BHP Billiton, Glencore Xstrata and Rio Tinto are among miners trimming costs and headcount after prices from copper to nickel slumped in the past three years, reducing revenue. Capital expenditure in mining is falling and moving markets including copper into a deficit, Hambro said.

The Bloomberg World Mining Index lost 26 percent in 2013, compared with a 20-percent gain in the MSCI All-Country Index tracking equities. Comex copper futures have averaged $3.107 a pound since at least 2005, a level which Hambro described as “strong.”

“The shares haven’t been weak because commodity prices are weak,” Hambro said. “They have been weak because the management had been doing a bad job but we are now seeing the management doing a much better job.”