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Iron majors may tap 'unprecedented' pricing power to stem rout

  1. 331 Posts.
    From this morning's AFR:

    Iron majors may tap 'unprecedented' pricing power to stem rout

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    The world's biggest iron ore miners have accumulated an unprecedented amount of pricing power, Morgan Stanley says Carla Gottgens.

    by Jasmine Ng

    The world's biggest iron ore miners have accumulated an unprecedented amount of pricing power after boosting market share, according to Morgan Stanley, which said they may now have an incentive to use the new-found clout by curbing supply to spur a rally.
    The four largest producers have expanded their combined share of global supply to 75 per cent after they raised low-cost output and smaller rivals quit, the bank said in a report received on Monday. Brazil's Vale SA may slow the ramp-up of its S11D project, while Australia's BHP Billiton and Rio Tinto could delay growth or cut production, it said.
    The price of iron ore has sunk 45 per cent this year, dropping below $US40 last week, as producers including Vale, BHP Billiton and Rio Tinto pressed on with expansions to defend market share. While boosting output as quickly as possible was the most rational approach for the top miner over the last decade, they may now need new strategies after the market weakened, Morgan Stanley said.
    "What's needed to buoy the ore price? Vale, Rio Tinto, BHP Billiton to end their competitive supply surge and act more rationally in this weakened market," analysts Tom Price and Joel Crane wrote. "Vale's the last to deliver big tons to the market: if a moderation of its supply-growth strategy is followed by the Australians, this will secure a price above that of market expectations."

    DROP OF 80 PER CENT FROM PEAK
    Ore for delivery to the Chinese port of Qingdao dropped 4.3 per cent last week to $US38.30 a tonne on Friday, a record low in daily prices compiled by Metal Bulletin Ltd. going back to May 2009. The commodity has sunk 80 per cent from its peak in 2011.
    BHP spokeswoman Emily Perry said the miner's strategy was unchanged, and noted "numerous on-the- record comments from us in relation to the market setting the price". She cited a comment in June from Jimmy Wilson, BHP's iron ore president, that BHP's share of the seaborne market has remained at about 17 per cent.
    Rio Tinto and Vale executives weren't immediately available to comment.

    "Most in the market are transfixed on the ore price's collapse, convinced that the passing of the commodity boom has permanently crushed the value in this trade," the bank said. "However, the price fall has also prompted the closure of high- cost production worldwide, including in China. Indeed, this market structure is evolving rapidly into one of the most highly consolidated trades."
    In March, Fortescue Metals chairman Andrew Forrest called for the big miners to cap output to revive prices. The proposal was rejected by rivals, including Rio chief executive officer Sam Walsh, who said the idea was nonsense as it "won't help us in the longer term to prop up projects that are actually not competitive".
    Iron ore remains above the levels seen in recent decades. The raw material went as low as $US10.51 a tonne in 1988, when annual contracts were negotiated between the largest miners and some steel mills, the International Monetary Fund said.
    While top producers had a similar share of global supply during the annual benchmark era before 2005, the demand side was even more consolidated at that time as only the top mills in Japan and Korea represented all Asian suppliers, Morgan Stanley said. Since then, China's entry distorted the consumer side and the major miners now possess an unprecedented level of pricing power, it said.
    "At current price levels, the incentive exists for them to exercise it," the bank said.
    Bloomberg
 
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