Article on iron ore !
Bloomberg :
Iron Ore’s $250 Billion Glut Pressures Rio to Vale: Commodities
The world’s biggest iron-ore producers are planning $250 billion of new mines, threatening to deepen a price slump for the commodity already forecast to drop for at least the next three years.
Mining companies are facing growing investor pressure to defer or cancel projects to stem price declines. Rio Tinto Group (RIO), the second-largest iron ore exporter, will decide on one of the biggest industry expansions in Western Australia in the second half. A decision to delay would boost its earnings in 2015 by $3.7 billion, according to Liberum Capital Ltd.
The price of iron ore, the most shipped commodity after oil, more than tripled in the past decade, encouraging the biggest mining companies to boost output. That was before a surge in Chinese steel output that drove the bull market through 2011 started to wane. Given iron ore operations made up 78 percent of Rio’s earnings last year and more than 90 percent at Brazil’s Vale SA (VALE5), producers are being forced to review plans.
“It’s the most important issue the mining industry is facing today -- whether or not to collectively act to destroy the single greatest source of value generation,” said Paul Gait, a London-based analyst at Sanford C. Bernstein & Co. “Getting this right and not repeating the mistakes of the past is absolutely key.”
Investors should be concerned. According to Credit Suisse Group AG, over the last three years, 80 percent of the time iron ore prices have fallen European mining companies have underperformed.
Over-Enthusiastic Investing
“We’ve been putting as much pressure as possible on management teams to rein in some of the over-enthusiastic investing of the cash-flow they’ve been making over the last few years,” Evy Hambro, manager of BlackRock Inc. (BLK)’s $10 billion World Mining Fund which includes investments in the four biggest iron ore exporters, told Bloomberg Television in a March 27 interview.
Rio has approved a $5.9 billion expansion of port and rail facilities in Western Australia to boost export capacity to 360 million tons a year from 290 million tons. A decision on the mining part of the expansion is yet to be made.
It may cost $3.5 billion, add 6 percent to global supplies and trim prices as much as $18 a ton in 2015, Liberum said. That’s equivalent to 13 percent of the current price. New supplies and slower growth in steel demand will weigh on prices in the second half, said Greg Lilleyman, the head of Rio’s operations in Pilbara.
“In terms of new projects, if prices are lower moving forward than the period we’ve just come from, they’re not going to be easy,” he said at a conference in Perth on March 19.
A spokesman for Rio Tinto declined to comment on whether the company will defer the Pilbara expansion.
Pricing Environment
“BHP, Vale and Rio all need to get with the program here,” Bernstein’s Gait said. “It’s much better for them to preserve the current pricing environment and keep prices high rather than invest billions and billions of dollars of capex simply to chase price downwards.”
BHP Billiton Ltd. (BHP) is expanding its Jimblebar mine in Western Australia to add 35 million tons of capacity next year. The company is looking “forward to approving one of the lowest capital costs expansion opportunities in the iron ore industry,” Chief Financial Officer Graham Kerr said Feb. 20.
A spokesman for Melbourne-based BHP declined to comment on whether the third-biggest exporter was considering scaling back plans.
Hugely Profitable
“You can have the view that perhaps if you hadn’t brought all this supply online than the price would’ve stayed higher,” Kerr said yesterday at the Bloomberg Economic Summit in Sydney. “The reality is that someone else would’ve produced the tons to the market. Even if prices do come down in iron ore in the next four of five years it will still be a hugely profitable business for us.”
Vale’s Serra Sul project, part of the Carajas mining complex in northern Brazil, is the industry’s most expensive project at almost $20 billion. It will add 90 million tons of capacity from late 2016. Vale’s press office in Rio de Janeiro declined to comment on whether the company will defer expansion plans.
Still, the three biggest suppliers, responsible for about 60 percent of global exports, are producing at low enough costs to deliver significant profits at current prices, according to BlackRock’s Hambro.
Phenomenal Price
“If you are producing iron ore for $30 or $40 a ton and the price is a $130 or $150 or $100, it is a phenomenal price,” he said. “You are making huge margins and if you are a Rio Tinto or a BHP and you’re producing hundreds of millions of tons that’s a gigantic amount of cash-flow.”
The price of iron ore delivered to China, the world’s biggest buyer, will drop 20 percent to $110 a ton in 2015, according to the median of six analysts compiled by Bloomberg. It will average $125 this year and $115 in 2014, according to the analyst estimates.
Prices have dropped 12 percent since reaching a 15-month high of $158.90 a ton on Feb. 20 as China’s industrial output had the weakest start to a year since 2009 and concern rose that curbs on construction in the country will reduce demand for iron ore.
Great Wall
Iron ore with 62 percent content delivered to the Chinese port of Tianjin rose 1.1 percent to $140.6 a dry ton yesterday, according to the Steel Index Ltd. The “great wall” of new supply may see prices drop as low as $80 a ton by 2018, according to Deutsche Bank AG.
The 50 largest undeveloped projects could more than double global seaborne supplies by adding 1.4 billion tons of production at a cost of $246 billion, Goldman Sachs Group Inc. said in a March 19 report. The list of projects is primarily comprised of those planned though not yet funded.
The three most significant planned new mines are by Rio in Western Australia, Vale’s Carrajas venture and Fortescue Metals Group Ltd. (FMG)’s Kings project, also in Western Australia, according to Liberum Capital.
“The incentive for major producers to under-deliver on expected production is high,” said Richard Knights, an analyst at Liberum. Vale and London-based Rio are the most likely to delay new projects, he said.
The market will shift from a deficit this year to a surplus of as much as 150 million tons next year, growing to more than 200 million tons in 2015 and 2016, Credit Suisse analysts Andrew Shaw and Marcus Garvey wrote in an April 3 report. Goldman Sachs estimates a surplus of 112 million tons in 2014 compared with a forecast deficit of 4 million tons this year.
Last Resort
“Clearly, such an overload is unsustainable,” the Credit Suisse analysts said. “There is no market of last resort beyond leaving the ore in the ground.”
Some producers have already started to respond to the deteriorating outlook for prices. Last year BHP, the biggest mining company, shelved a planned expansion of a harbor in Western Australia, estimated to cost $22 billion by Credit Suisse.
BHP, Rio and Anglo American Plc (AAL) reported lower profits in February on rising costs and waning global growth. The CEOs of those three including Rio’s Tom Albanese have quit or announced plans to depart after investors criticized them for the acquisition of assets whose value was later written down.
Rio’s former head of iron ore Sam Walsh replaced Albanese on Jan. 17 after his predecessor quit following a $14 billion writedown on the value of takeovers including a $38 billion cash deal for Alcan Inc. in 2007.
“It’s a key test for Sam Walsh,” Bernstein’s Gait said. “The value impact of destroying the iron ore market is worse than the value impact of Alcan. He can either go down in history as the guy who destroyed more value than Tom Albanese or he can curtail production.”