Article Lead - wide6533924512o8lvimage.related.articleLeadwide.729x410.12wg31.png1421978900500.jpg-620x349Arrium said that falls of about 45 per cent in the iron ore price had left the company “absorbing cash”.

The muck is starting to hit the fan in Australia’s iron ore industry, where companies reported more than $3billion in asset writedowns this week,

along with the probable  loss of more than 500  jobs.

Eight months after the price dipped to less than  $US100 a  tonne,  Australian  miners are giving up hope of a significant  price recovery, and are instead cutting their businesses down to

size. Australia’s fourth-biggest iron ore exporter, Arrium Limited, took a clear step in that direction on Friday when it announced the ‘‘mothballing’’ of one of its two operations in South Australia.

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The closure of the Southern Iron assets is a symbolic retreat for Arrium, which has spent the past four years trying to change its brand from that of a pure-play steelmaker to a diversified group with a large iron ore export business.

The closure will reduce Arrium’s exports from 12.5 million tonnes a  year  to about   9 million tonnes, and will force the company to shed 200 full-time workers. A further 380 contracting jobs on the project have also been thrown into doubt.Its shares fell almost 9 per cent to 20.5¢ on Friday.

Arrium boss Andrew Roberts said an iron ore price significantly above the market’s consensus view of future  prices would be needed to reopen the assets, which were of good quality but a troublesome 600 kilometres from port.

‘‘There is some uncertainty around the nature of the price recovery and the time that it will take, and our mining business at this point in time is absorbing cash rather than contributing cash back to the group, so today we have announced the redesign of our mining business,’’ he said.

Arrium bought Southern Iron from WPG Resources for $320million near the top of the iron ore market in August 2011. It then spent hundreds of millions of dollars  developing the assets and connecting them  to the company’s existing mines and ports near Whyalla.

Just months after the 2011 transaction, WPG chairman Bob Duffin lauded the ‘‘full’’ price paid for the assets on the grounds that ‘‘we felt that iron ore prices were unsustainably high and were likely to fall.’’

Mr Roberts conceded on Friday the acquisition had not realised full value yet for Arrium, and the company would  record asset impairments of $1.1billion on its mining business next month.But he  said the acquisition would continue to have benefits.

‘‘In terms of the original investment, plus the ongoing investment required to mine the business, we haven’t realised the full value at this point,’’ he said.

‘‘Going forward the redesigned business will extract value because of the investments we made at that time. We wouldn’t be able to do what we are proposing to do in the redesign without the investments in Southern Iron two or three years ago, so there is still ongoing value that we will extract from the investment.’’

The changes would strengthen Arrium’s iron ore position by lowering its cost of production by 20 per cent to $57 a  tonne, he said.‘‘We have a business that is going to be sustainable and it is a business that will be generating positive cash [in FY16],’’ he said.

The changes will push Arrium below the likes of Atlas Iron and Mt Gibson on what is an increasingly fluid cost curve.

Atlas Iron said this week that its all-in cost of production had fallen by 17 per cent in recent months to about $65 a tonne, while Fortescue is estimated by UBS to have a break-even price of $US59 a tonne.

The declining Australian dollar and slumping oil price has provided some relief to miners, who have been cutting spending.But with the price 65per cent below its 2011 peaks at just $US66.79 a tonne on Friday, further asset impairments and job losses appear inevitable.

Last month Atlas said it would record up to $900million in writedowns on assets it acquired between 2009 and 2011, while Hong Kong giant Citic Limited said on Tuesday it would impair the book value of its Sino Iron project in Western Australia by up to  $US1.8billion.

UBS analyst Glyn Lawcock believes about 30per cent of the world’s iron ore production is loss-making at current prices, and high-cost juniors will have to ‘‘cut costs materially to survive’’.

‘‘We believe it will take time for high-cost supply to exhaust cost-cutting and financing options before they exit the trade,’’ he said in a note to clients.