Jasmine Ng Singapore
THE BIGGEST iron ore producers including BHP Billiton and Rio Tinto Group are pursuing a flawed strategy by flooding an oversupplied market and they should slowdown expansion plans, according to the premier of western Australia.
“The signal’s going out to the market that there’s going to be ever-increasing amounts of iron ore available even at lower prices,” Colin Barnett said in Singapore on Sunday.
“The market signal is wrong, and I believe the major companies have a flawed strategy. I don’t think it’s good business for them or their shareholders,” said Barnett, whose state includes the ore-rich Pilbara, where the bulk of Australian supply is concentrated.
Iron ore sank to a 10-year low below $50 (about R600) a ton this month as surging low-cost supply from Rio, BHP and Brazil’s Vale spurred a glut just as China’s demand faltered.
The Australian government was contemplating a price as low as $35 in the May 12 budget, the Australian Financial Review said yesterday, citing Treasurer Joe Hockey. The slump is hurting government revenues in the biggest shipper and forcing smaller producers to close, with Atlas Iron saying on Friday it was halting output.
“They should reschedule some of their production and give a signal to the market that yes, we’ll cater to iron ore demand and we’ll cater for growth, but we’re not going to flood the market,” Barnett said in Singapore on Sunday.
“If Rio and BHP come to me in the future, they will have to seek rights to expand their projects. I might say ‘yes’, I might say ‘no’.”
Shareholders
BHP declined to comment specifically on Barnett’s remarks, while highlighting statements made by its executives. Jimmy Wilson, the head of BHP’s iron ore unit, said last month that increasing production while improving efficiency was aiding Australia’s competitiveness. Cutting output would penalise shareholders as supply would be made up by others.
Rio did not immediately reply to an e-mail and call seeking comment. Chief executive Sam Walsh said in February that if the company cut output after prices sank, the forfeited supply would be made up by rivals with higher costs, and that would not be in his shareholders’ interests.
Ore with 62 percent content at Qingdao fell 1.7 percent to $47.53 a dry ton on Friday, according to Metal Bulletin. Prices declined to $47.08 on April 2, the lowest since 2005, based on daily and weekly data from Metal Bulletin and annual benchmarks for ore delivered to China compiled by Clarkson. The commodity is 33 percent lower this year.
No floor
Hockey’s outlook for prices as low as $35 compared with $60 in December’s budget update and would mean about A$6.25 billion (R57.4bn) less revenue a year, the report said. There seems to be no floor, the newspaper cited the Treasurer as saying.
Citigroup cut its price forecasts through 2020 and said that prices might drop into the $30s, according to a commodities report received yesterday.
Iron ore may average $45 a ton this year, down from a previous forecast of $58, analysts led by Ed Morse wrote. The commodity will average $36 in the third quarter and $38 in the final three months of the year.
Global seaborne supply will expand 8.2 percent this year, outpacing demand growth of 3.9 percent, according to Morgan Stanley. China, which buys about two-thirds of the iron ore transported by sea, grew last year at the weakest pace since 1990 and will probably slow further in 2015.
“I do expect BHP and Rio to expand and have expansion plans, but not bringing it on too quickly,” Barnett said. “To bring on rapid expansion in a depressed market is just not good business.” – Bloomberg