Brazil’s Vale has become the first of the world’s four iron ore majors to declare it may cut production in the face of sliding prices and has left Rio Tinto standing alone in refusing even to pay lip service to calls for production restraint.
Given Rio, BHP Billiton and Fortescue Metals are all operating in Western Australia’s Pilbara region, Vale’s declaration that it could be the first to shut in existing production bodes well for Australia’s share of a market in which prices have slumped from $US135 a tonne at the start of last year to about $US57 now.
Speaking to investors on Thursday night, Vale iron ore chief Gerd Poppinga said the company could take up to 30 million tonnes of higher-cost annual production out of the market as it continued to increase production from lower-cost expansions, putting in doubt 100 million tonnes of new capacity now under construction.
“Vale will operate with a mature eye on the markets ... so that we can make sure we maximise value and returns for shareholders,” Mr Poppinga said.
“If the market requires it, we will reduce production flows by up to 30 million tonnes” this year or next year.
As with statements last week from BHP that it could slow its Pilbara growth plans, Vale’s statement sent iron ore miners’ shares, which had pulled back in recent days, soaring.
Fortescue rose 9 per cent, BC Iron finished up 19 per cent and Mount Gibson rose 5 per cent.
Fortescue chairman Andrew “Twiggy” Forrest welcomed Vale’s move.
“I am pleased, certainly, that Vale, too, have adopted specifically what Fortescue stands for and BHP also signalled that it would expand according to the market, not over the top of it,” Mr Forrest told The Weekend Australian.
“Adopting a policy of expanding at any price or oversupplying the market in the medium term, which now only Rio is doing, is callous immaturity and debilitating to the Australian economy.”
Mr Forrest let fly after Rio’s iron ore chief, Andrew Harding, told Fairfax Media that Fortescue should fix its own business rather than question Rio’s strategy of expanding profitably into an oversupplied market, which Mr Harding said was good for the company and the nation.
“This is the organisation that bought Alcan at the top of the market at a huge premium, nearly went bankrupt in the global financial crisis, bought Mozambique coal assets and wrote off nearly every cent of a multi-billion-dollar purchase, knocked back $US4.5bn for the iron ore company of Canada, which would be worth less than scrap metal at these prices,” Mr Forrest said.
“I would like Australia to know when the sovereign credit rating is threatened, when standards of living do fall, when deficits grow, and surpluses are pushed further out, you can look at what has been pulled out of the Australian economy by this predatory volume behaviour attitude of the British-based Rio Tinto,” Mr Forrest added.
Rio, like Vale and BHP, has declared it will continue to spend money on low-cost expansions.
Unlike BHP and Vale, it still feels it can make a good return on all its expansions and production, which will involve increasing mine output to match already built infrastructure.
“It’s commercially logical and in the best interests of our shareholders and stakeholders that we continue placing our high-quality tonnes into the market,” a Rio spokesman said yesterday.
“If we suspended or capped production, other suppliers around the world would fill the void. Australia would lose market share, taxes and royalties.”
Mr Forrest disagreed, saying Rio’s insistence that it would keep expanding was hurting sentiment and driving down prices.
“It’s the damage done by the nauseatingly repetitive, hairy-chested statements that show complete disregard for the interests of their host nation — that they’re going to be the last man standing, that they’ll expand at any price,” Mr Forrest said.
“In London, you’re not going to feel that ill wind, you’ll just look at Australia like it’s a chess board — and not that it’s full of very real people with jobs, mortgages, homes and aspirations and the unnecessary unemployment and damage to business.”
Citi analysts said Vale’s comments on production were probably more reflective of its higher-cost mines being loss-makers at low prices, rather than a change in strategy.
“Vale should not subsidise losses on this production indefinitely — and so closures are a matter of fiscal discipline,” Citi said in a note.
“It is relevant for investors to understand that the world’s third-lowest-cost iron ore producer is losing money on some tonnage at current prices.”
BCI Price at posting:
51.0¢ Sentiment: Buy Disclosure: Held
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