By Scott Patterson and Alex MacDonald
Iron-ore prices plunged below $50 a ton this week, amid
softening demand from China that has boosted concerns about the
bottom lines of some of the world's biggest mining outfits.
Recent price declines in this basic ingredient of steel have
exceeded even the sharp slide in crude oil, as iron ore fell to its
lowest level in a decade at $46.70 a ton on Thursday, according to
Steel Index. That's down 75% from its high of $190 a ton reached in
2011.
Prices have fallen for six consecutive week, and have ticked
lower 10 out of 13 weeks this year.
Iron ore is among the most ubiquitous metals mined across the
world and its price is seen as a barometer of industrial growth in
developing countries such as China. Supercharged economic growth in
China had fueled a boom in demand for iron ore beginning about a
decade ago, but a cooling of that country's industrial engine along
with a glut of iron-ore supplies has caused prices to slide.
The world's biggest iron-ore producers-- Rio Tinto PLC, BHP
Billiton PLC and Vale SA--have continued to pump out huge amounts
of iron ore, even as prices have fallen, putting further downward
pressure on the market, analysts said. Futures contracts tied to
iron ore prices in the fourth quarter recently changed hands for
$45 a ton.
"The price can carry on going lower," possible hitting $40 a
ton, said John Meyer, an analyst at SP Angel, a London mining
broker.
RBC Capital Markets, which had predicted that iron-ore prices
would stabilize this year, reversed its call Wednesday.
"The support for iron ore prices we had been looking for in late
2014 and early 2015 did not materialize," RBC said in a note,
citing falling demand in China and the oversupply.
In Australia, where iron-ore mining is a major driver of the
economy, the selloff in iron ore has increased the likelihood of an
interest-rate cut by the Reserve Bank of Australia next week, said
Stan Shamu, market strategist at IG.
The situation also raises questions about a
survival-of-the-fittest strategy followed by Rio Tinto, BHP
Billiton and Vale, analysts say. These giant miners have raced
headlong to boost production with the apparent goal of squeezing
out weaker operations that produce iron ore at a higher cost.
It is a risky strategy, based on the assumption that high-cost
producers will quit the field as prices dip below production costs,
leaving the sector largely in the hands of the major producers.
That has already played out, to some extent. Iron-ore producing
nations that are at risk of scaling back or have scaled back
production include Iran, Canada, the Philippines, Chile and Sierra
Leone, according to Jefferies analyst Chris LaFemina. West African
iron ore output alone is forecast to more than halve to 17 million
tons following the bankruptcy of two Sierra Leone iron ore
producers, London Mining PLC and African Minerals Ltd., Mr.
LaFemina noted.
But big miners are also vulnerable. A $5 dip in iron ore prices
would shave $672 million in earnings from BHP and $674 million from
Rio Tinto's net income, according to estimates by Liberum Capital,
a London broker.
Glencore PLC Chief Executive Ivan Glasenberg has been a harsh
critic of his competitors, arguing that boosting production in the
face of falling prices "cannibalizes" the value of assets in the
ground. Glencore, which doesn't produce iron ore, has cut back on
coal production amid sharp declines in prices.
For their part, the big iron-ore producers argue that it is
still a highly profitable business, since it costs them roughly $20
to $30 a ton to dig the ore out of the ground. Fueled by declining
costs of production, BHP's West Australian iron-ore business in the
second half of 2014 boasted a healthy operating margin of 49%.
Iron-ore prices averaged $82 a ton during that period, however,
75% higher than current prices.
Write to Scott Patterson at scott.patterson@wsj.com and Alex
MacDonald at alex.macdonald@wsj.com
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