Phoebe Sedgman Melbourne
THE COLLAPSE in iron ore prices may have further to run as global supply increases and steel demand growth slows, according to Moody’s Investors Service, which said it might reduce ratings on producers.
About 300 million tons of new and expanded supply would come on stream over the next few years, analysts including Moody’s Carol Cowan said in a report received yesterday.
Global steel production growth in 2014 remained muted with China, the key driver of consumption, continuing to slow, Moody’s said.
Iron ore tumbled 39 percent this year after companies including Rio Tinto Group, BHP Billiton and Vale raised low-cost output in Australia and Brazil, spurring a global glut. The market is in the midst of a transition without precedent in recent commodity history as supply surges and some higher-cost mines are displaced, according to Macquarie Group.
“Iron ore prices have collapsed,” Moody’s said in the report dated October 17. “With slowing global steel production growth rates, iron ore prices remain vulnerable to the downside and we expect continued volatility.”
Ore with 62 percent content delivered to Qingdao, China, posted a third straight quarterly loss in the three months to September, and dropped to $77.97 (R1 100) a ton on September 29, the lowest level since September 2009. The price rose 1 percent to $81.60 a ton yesterday, according to data from Metal Bulletin.
“Downward rating actions for iron ore producers could result as Moody’s reassesses the impact of a protracted pricing weakness,” it said.
The so-called price sensitivity for iron ore was revised to a range of $75 to $85 a ton to 2016, according to the report.
While low-cost producers such as BHP, Rio and Vale had more tolerance to absorb lower prices in the near term than Cliffs Natural Resources, Fortescue Metals Group and Atlas Iron, the compression of earnings and cash flow was nonetheless value destructive, it said.
Stockpiles in China were contracting, which showed demand was outstripping supply and high-cost production was leaving the market, Fortescue chief executive Nev Power told reporters on Thursday. The world’s fourth-biggest exporter said shipments rose 66 percent in the three months to September 30 as it expanded output from Western Australia mines.
“We shouldn’t panic when there’s a blip in iron ore prices,” Rio chief executive Sam Walsh told reporters in Sydney on Wednesday, dismissing suggestions that the company would not boost returns.
In August, Rio raised its dividend and flagged further returns, saying it was on its way to becoming a “cash machine” as it cut costs and raised production.
Cliffs Natural, the largest US producer, expected to take a writedown of about $6 billion on its seaborne iron ore and coal assets after prices fell, the company said on Friday. The shares lost 67 percent this year.
Australia and Brazil, the two largest suppliers, would raise their combined share of global seaborne supply from 73 percent last year to about 90 percent by 2020 as high-cost mines were forced to close, Macquarie Group said on Tuesday.
The suggestion that high-cost producers, particularly in China, will leave the market and reduce supply may take longer than expected to happen, according to Moody’s. Many mines and steel companies in the country were state-owned, and this so-called captive iron ore supply could result in sustained operations despite losses, it said in the report.
Global seaborne output would exceed demand by 26 million tons this year and 41 million tons in 2015, UBS said in a Wednesday report that cut price forecasts for 2015 and 2016 while sticking to a call for an end-of-year rally.
Shares in Rio have lost 9.2 percent in London this year, while BHP has fallen 11 percent. In Sydney, Fortescue has retreated 41 percent. Stock in Rio de Janeiro-based Vale has sunk 30 percent. – Bloomberg