"....But big miners are also vulnerable. A $5 dip in iron ore prices would shave $672 million in earnings from BHP and $674 million from Rio Tinto’s net income...."
Iron Ore’s Meltdown Raises Questions About Miners
Analysts question wisdom of keeping production high to drive out smaller producers
By Scott Patterson and Alex MacDonald
April 2, 2015 11:01 a.m. ET
Iron-ore prices plunged below $50 a ton this week, amid softening demand from China that has boosted concerns about the bottom lines of some of the world’s biggest mining outfits.
Recent price declines in this basic ingredient of steel have exceeded even the sharp slide in crude oil, as iron ore fell to its lowest level in a decade at $46.70 a ton on Thursday, according to Steel Index. That’s down 75% from its high of $190 a ton reached in 2011.
Prices have fallen for six consecutive weeks, and have ticked lower 10 out of 13 weeks this year.
Iron ore is among the most ubiquitous metals mined across the world and its price is seen as a barometer of industrial growth in developing countries such as China. Supercharged economic growth in China had fueled a boom in demand for iron ore beginning about a decade ago, but a cooling of that country’s industrial engine along with a glut of iron-ore supplies has caused prices to slide.
The world’s biggest iron-ore producers—
Rio Tinto PLC,
BHP Billiton PLC and
Vale SA—have continued to pump out huge amounts of iron ore, even as prices have fallen, putting further downward pressure on the market, analysts said. Futures contracts tied to iron ore prices in the fourth quarter recently changed hands for $45 a ton.
“The price can carry on going lower,” possible hitting $40 a ton, said John Meyer, an analyst at SP Angel, a London mining broker.
RBC Capital Markets, which had predicted that iron-ore prices would stabilize this year, reversed its call Wednesday.
“The support for iron ore prices we had been looking for in late 2014 and early 2015 did not materialize,” RBC said in a note, citing falling demand in China and the oversupply.
In Australia, where iron-ore mining is a major driver of the economy, the selloff in iron ore has increased the likelihood of an interest-rate cut by the Reserve Bank of Australia next week, said Stan Shamu, market strategist at IG.
The situation also raises questions about a survival-of-the-fittest strategy followed by Rio Tinto, BHP Billiton and Vale, analysts say. These giant miners have raced headlong to boost production with the apparent goal of squeezing out weaker operations that produce iron ore at a higher cost.
It is a risky strategy, based on the assumption that high-cost producers will quit the field as prices dip below production costs, leaving the sector largely in the hands of the major producers.
That has already played out, to some extent. Iron-ore producing nations that are at risk of scaling back or have scaled back production include Iran, Canada, the Philippines, Chile and Sierra Leone, according to Jefferies analyst Chris LaFemina. West African iron ore output alone is forecast to more than halve to 17 million tons following the bankruptcy of two Sierra Leone iron ore producers, London Mining PLC and African Minerals Ltd., Mr. LaFemina noted.
But big miners are also vulnerable. A $5 dip in iron ore prices would shave $672 million in earnings from BHP and $674 million from Rio Tinto’s net income, according to estimates by Liberum Capital, a London broker.
Glencore PLC Chief Executive Ivan Glasenberg has been a harsh critic of his competitors, arguing that boosting production in the face of falling prices “cannibalizes” the value of assets in the ground. Glencore, which doesn’t produce iron ore, has cut back on coal production amid sharp declines in prices.
For their part, the big iron-ore producers argue that it is still a highly profitable business, since it costs them roughly $20 to $30 a ton to dig the ore out of the ground. Fueled by declining costs of production, BHP’s West Australian iron-ore business in the second half of 2014 boasted a healthy operating margin of 49%.
Iron-ore prices averaged $82 a ton during that period, however, 75% higher than current prices.
http://www.wsj.com/articles/iron-ores-meltdown-raises-questions-about-miners-1427986880
