By Rhiannon Hoyle
SYDNEY--The slump iron ore prices to a near decade low is
turning the spotlight back onto the world's biggest miners and
their strategy of churning out ore at record rates.
While prices have been weak for a while, fears of a global glut
have deepened in recent days following evidence of slowing steel
output in China, the world's biggest consumer of the steelmaking
ingredient, by far.
The price tumble comes at a bad time for major producers such as
Anglo-Australian BHP Billiton Ltd. and Brazil's Vale SA., which are
counting the cost of a deadly dam failure at their jointly-owned
iron ore mine in Brazil earlier in November. The two firms are the
world's top shippers of iron ore, along with Rio Tinto PLC.
Iron ore fell to $43.40 metric ton Tuesday, down 12% this month
and far below the 2011 high above $191, according to data provider
The Steel Index.
The slump raises questions over whether the determination of big
producers to keep pumping record volumes into a falling market is
working.
BHP and Rio have drawn criticism from some investors and from
rivals and lawmakers who say they are depressing prices by digging
up more than the market needs. Australia's government in May
considered holding a parliamentary inquiry into the matter,
although that proposal was ultimately discarded.
The two Australian mining giants have long argued that iron ore
is freely traded in a global market, and their expansions were
planned years ago and are in the best interests of
shareholders.
Their strategy is to produce as much ore as possible for the
lowest cost, rather than extract less in the hopes of bolstering
prices. Thanks to economies of scale, they still generate a healthy
margin on each ton they ship, even with prices down.
Still, profits for both producers--which rely heavily on iron
ore for earnings--have nose-dived. BHP's net profit plunged 86% in
the year through June.
The company's financial health is being closely tracked by the
market following what Chairman Jac Nasser recently called "one of
the most difficult" years in the company's 130-year history.
Shareholders worry that the miner won't be able to sustain its
long-held pledge to maintain or raise dividends each year amid the
slump in commodity prices.
"At spot prices, cuts to BHP's progressive dividend policy seem
inevitable," Australian bank Macquarie said Wednesday.
BHP's share price sagged close to a decade-low in Australia in
recent weeks, following the Nov. 5 Brazilian dam collapse that sent
mud cascading through remote mountain valleys, ripping apart small
colonial towns.
Some analysts have estimated the cleanup costs will eventually
amount to around $1 billion, although both BHP and Vale have said
responsibility for the mine's operations lies with their Samarco
joint venture, which is operated independently.
Despite production cutbacks by some higher-cost producers, the
iron-ore market will likely still be oversupplied by 150 million
tons by 2018, UBS metals and mining analyst Andreas Bokkenheuser
forecasts.
BHP's production rose 14% to a record 233 million metric tons in
the year through June. Rio Tinto is also producing more.
Meanwhile, in Brazil, Vale is building a $16 billion operation
that it touts as "the biggest project in our history and in
international mining."
"Clearly we are nearing the threshold point of pain for some
Australian miners, but that does not mean that prices can't fall
further," said Westpac economist Justin Smirk.
Rising supplies could push prices below $40 per ton early next
year, according to Citigroup, further pressuring miners' earnings
as China makes less steel. Its output was down 3.1% in October from
a year earlier, according to the World Steel Association, an
industry body.
To be sure, prices may soon find a temporary floor after the
recent sharp falls. "A further stabilization in China's steel
prices in coming days could be a sign that iron-ore prices are
close to a bottom," Australia and New Zealand Banking Group
analysts wrote in a note.
The world's No. 4 iron-ore exporter, Fortescue Metals Group
Ltd., has been racing to shore up its finances. On Wednesday, it
said it had agreed to buy back US$750 million in debt, a move it
said will save US$56 million in interest costs annually.
Meantime, the industry's smaller fish with higher production
costs are feeling the strain.
On Tuesday, BC Iron Ltd. Chairman Anthony Kiernan said the small
Australian producer was preparing "to step outside the iron ore
space."
There is "no point" in building a current and future strategy on
the hope that iron-ore prices will recover, he said.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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(END) Dow Jones Newswires
November 25, 2015 04:05 ET (09:05 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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