In Commodity News 05/05/2015
IRON-ore prices would need to fall and linger about $30 per tonne for companies such as Kumba Iron Ore to consider scaling back output, Liberum Mining Team said last week.
Investec analysts said the recent uptick in iron-ore prices from a decade low at the start of last month was merely a seasonal blip. They expected prices to continue falling.
The price of iron ore fell to $47 per tonne early last month, but put in a stronger performance towards the end of the month when BHP Billiton indicated a slowing of its iron-ore growth plans. Iron ore was last trading at about $57 per tonne. The price averaged $135 per tonne in 2013.
It has been driven lower by the amount of iron ore on the market and by softening demand from China.
Brazil’s Vale, BHP Billiton and Rio Tinto — the world’s leading iron-ore miners — have spoken of expansion plans in the commodity, adding to the gloom that has driven down prices.
Through expansion the majors would increase their share of the market, driving out smaller, higher-cost producers.
However, London-based Liberum’s Richard Knights and Ben Davis said a sizeable amount of iron-ore production from these smaller players was proving to be “sticky”.
“A combination of pressure from vested interests, cross-subsidisation, currency devaluation, Chinese ownership or an unsurpassable freight-location advantage will contribute to keeping ‘marginal’ supply open,” the analysts said in a note.
Chinese imports from countries other than Brazil and Australia, where the big three operated, had shrunk by 80-million tonnes this year, they said.
Kumba, SA’s largest iron-ore miner, was barely profitable at prevailing prices, Liberum said.
Kumba has said it is deepening cost cuts. Two-thirds of Kumba’s 45-million tonnes of annual production is a lumpy product — chunks of iron ore rather than the fine, sand-like material of other mines.
The lumpy product attracts a premium. Some companies producing fine ore convert it to pellets to attract the premium.
“Given the relative tightness of these sub-markets, any curtailment in pellet-lump supply could result in a sharp increase in premiums, which the like of … Kumba would be loathe to miss out on, hence delaying any closures,” Liberum said.
The expectation of large volumes of iron ore coming to the market was contributing to the weak price environment, Lourenco Goncalves, CEO of US miner Cliffs Natural Resources, said last week.
“The biggest problem for the iron-ore price at this point is not even the fact that the world is being flooded with iron ore. It is the fact that the market and the press and investors are being flooded with bad information about the expansion plans of three companies,” he said.
He called the seaborne iron-ore market a “doomed, horrible business” and one which is “cursed, a place not to be in”, adding he could not wait to get out of iron-ore mining in Australia and the export market to focus on mines in the US supplying American steel mills.
He said the big expansion projects would not come into being as the major companies would not have the cash flow to fund them because of low iron-ore prices.
Meanwhile, Goldman Sachs said in a note it did not expect the major iron-ore producers to alter their plans.
“The fact that the iron-ore industry will ‘produce a lot more’ going forward is precisely the problem when it comes at a time when demand is weakening,” Investec said.
“The recent blip up in iron-ore prices was, in our view, merely a seasonal restocking event that happens every year after Chinese new year. We believe that iron-ore prices will now recommence their downward trajectory,” it said.
Standard & Poor’s downgraded Anglo American, the parent of JSE-listed Kumba and owner of the new Minas Rio iron-ore mine in Brazil, to BBB-from BBB because it expects the iron-ore market to be in “a severe supply and demand imbalance in the next two years”.
It projected Anglo’s adjusted earnings before interest, tax, depreciation and amortisation to fall to about $5.6bn this year and $6.2bn at best next year compared to $7.5bn last year. Standard & Poor’s estimated an average iron-ore price of $45 per tonne for the rest of this year and $50 per tonne next year.
