Iron giants grind rivals in race for cheapest ore
Rival iron ore miners will be among the biggest casualties as the largest suppliers increase low- cost production and exacerbate a global glut, according to BHP Billiton Ltd.
The market for the steelmaking material is in the midst of a dramatic upheaval that’s squeezing high-cost producers and will probably halt development of major new mines, according to BHP, the third-largest exporter. Expansions by BHP, Rio Tinto Group and Vale SA, the three dominant exporters, have already precipitated a slump in prices to a five-year low.
“We have to deliver value, and in the pursuit of doing that unfortunately businesses which are on the wrong end of the cost curve, or which should have never started up in the first place anyway, will be impacted,” BHP Iron Ore President Jimmy Wilson told reporters Oct. 3. “We take no joy from that.”
The growing worldwide surplus, forecast by Goldman Sachs Group Inc. to swell from 52 million metric tons this year to 163 million tons in 2015, comes as a property slump and tight credit conditions restrict demand growth in China, the biggest consumer. Declining prices have prompted a battle for survival between Chinese domestic and high-cost seaborne ore, Macquarie Group Ltd. said in a report last month.
BHP may raise output by 65 million tons of annual capacity by mid-2017 by working its infrastructure harder, even as it concedes supply growth will exceed demand in the medium term, it said in a presentation. Rio Tinto, the cheapest producer, plans to add about 60 million tons of supply by 2017, while Vale, the world’s biggest producer, is seeking to double its shipments to China in the next five years, it said in August.
“They are very aware of what this excess capacity is going to do to the other players in the market, and that’s their competitive advantage,” said Michelle Lopez, a Sydney-based investment manager at Aberdeen Asset Management Ltd. Aberdeen, which holds BHP and Rio Tinto shares, managed about $550 billion globally as of June 30, according to its website.
A price of $80 a ton is a “pain point” for higher cost producers, Tom Albanese, chief executive officer of London-based Vedanta Resources Plc, said last month. Walsh, Albanese’s successor as Rio Tinto CEO, said in June that some “friendly competitors are going to disappear,” with prices at that level. Producers in Sweden and Canada are among companies that have idled or closed mines already this year.
About half of China’s annual production of 400 million benchmark-equivalent tons has either already left the market or will be shuttered, according to Wilson. Rio Tinto said in August that 125 million tons of high cost global output will exit the market this year. That contrasts with a prediction of a cut of just 40 million tons in China over the two years to 2015, according to a July forecast from Goldman Sachs Australia Pty’s Global Investment Research Executive Director Christian Lelong.
Without further cuts to supply, costly new mine projects probably won’t be economic, meaning deposits in West Africa may not be developed for a decade, according to Wilson. Since July, BHP has agreed to sell its interests in projects in Guinea and Liberia.
Ore with 62 percent content at the Chinese port of Qingdao was unchanged at $79.60 a dry ton on Oct. 3, according to Metal Bulletin. Prices fell for a third straight quarter in the three months through September, the longest such streak on record.
As output expansions help to lower costs for the largest ore miners, they also add to pressure on prices and erode margins for smaller competitors, according to David Radclyffe, a Sydney-based analyst at CLSA Asia-Pacific Markets.
African Minerals Ltd., Sierra Leone’s biggest iron ore producer, said last month it will probably breach debt covenants by the end of next year amid declining prices. Atlas Iron Ltd., with mines in Australia’s iron ore rich Pilbara, had its credit rating cut last week to the fifth-highest junk grade by Standard & Poor’s on expectations its earnings will slide.
BHP is seeking to cut costs to less than $20 a ton, excluding royalties and freight, it said today. Comparable costs for Rio were $20.40 a ton in the six months through June, according to an August filing. Both Rio and Vale are also seeking to make additional production savings.
“Charity starts at home,” Wilson told reporters. “We have to run our business as hard and as well as we physically can.”