Min­ers on credit watch as iron ore price plunges: S&P


Some of the world’s big­gest iron ore min­ers were Tues­day placed on “credit watch neg­a­tive” by Stan­dard and Poor’s, as ore prices plunge due to a sup­ply glut and soft Chi­nese de­mand.

The global rat­ings agency said the credit watch change was due to a low­er­ing of its iron ore price fore­casts to US$45 per tonne for the rest of this year, to US$50 for next year and US$55 for 2017.

The pre­vi­ous fore­casts were US$65 this year and 2016, and US$70 for 2017.

The price of the ore, a key in- gre­di­ent in steel­mak­ing, has fallen by 60 per­cent over the past 12 months to reach a decade-low of US$47.08 in early April.

The eight iron ore pro­duc­ers be­ing watched by S&P are An­gloAus­tralian gi­ants BHP Bil­li­ton and Rio Tinto, Brazil’s Vale, Australia’s Fortes­cue Met­als, An­glo-South African firm An­glo Amer­i­can, Chile’s CAP, Lux­em­bourg-based Eurasian Re­sources and South Africa’s Exxaro Re­sources.

“The re­vi­sion of our price as­sump­tions and the sharp fall of iron ore spot prices re­flect the se­vere sup­ply and de­mand im­bal­ance in the mar­ket, which we be- lieve could persist for the next two years,” S&P said in a state­ment.

It added that the lower price fore­casts were due to the con­tin­ued in­crease in iron ore sup­ply by ma­jor min­ers, softer growth in Chi­nese de­mand and higher-cost pro­duc­ers re­main­ing in the mar­ket longer than ex­pected.

S&P also placed West­ern Australia on credit watch neg­a­tive, say­ing tum­bling iron ore prices would “con­sid­er­ably re­duce” its min­ing roy­al­ties. The state is heav­ily de­pen­dent on the min­ing sec­tor for growth.

A credit watch meant there was a 50 per­cent chance of a rat­ing change, which in th­ese cases was down­wards, S&P’s man­ag­ing direc­tor for cor­po­rate rat­ings An­thony Flintoff said in a brief­ing, adding that the agency would an­nounce its de­ci­sions within 90 days.

On­go­ing con­cerns about the slump­ing price saw shares in BHP and Rio lose ground in Australia Tues­day. BHP fell 1.02 per­cent to close at AU$29.12 while Rio slipped 0.62 per­cent to end at AU$54.96.

Battle for Sur­vival

At­las Iron, a West Aus­tralian ju­nior miner, said last week it would sus­pend min­ing op­er­a­tions “due to re­cent sig­nif­i­cant falls in the iron ore price.”

“De­spite an ex­ten­sive cost­cut­ting pro­gram, to which staff and con­trac­tors have made sig­nif­i­cant con­tri­bu­tions, the global sup­ply-de­mand im­bal­ance for iron ore has driven prices down to the point where it is no longer vi­able for At­las to con­tinue pro­duc­tion,” the com­pany said in a state­ment.

The world’s four big­gest iron ore ex­porters — BHP Bil­li­ton, Rio Tinto, Vale and Fortes­cue, which make up 70 per­cent of the mar­ket — have ramped up pro­duc­tion to main­tain their share of ex­ports, ex­ac­er­bat­ing the price weak­ness.

Smaller min­ers such as At­las, which have higher pro­duc­tion costs, have been bat­tling to sur­vive.

Min­ing ser­vices firms were also ex­pected to be hit by the slump as pro­duc­ers cut costs to stay afloat, S&P credit an­a­lyst May Zhong said in the brief­ing.

The decline in prices has been made worse by shrink­ing pro­duc­tion costs on the back of weaker en­ergy prices — help­ing to keep mar­ginal pro­duc­ers alive — and fall­ing cur­ren­cies in com­mod­ity coun­tries like Australia, the rat­ings agency added.

At the same time, China’s move last week to cut its re­source tax by 60 per­cent from May 1 could add to the sup­ply glut.

“The re­cent tax cuts to the do­mes­tic iron ore pro­duc­ers means that the mar­ginal pro­duc­ers in China could stay in the mar­ket for longer be­cause of that, and that may con­trib­ute to a pro­longed pe­riod of iron ore price weak­nesses,” said Zhong.

Australia’s Trea­surer Joe Hockey warned Mon­day the iron ore price could drop to US$35 a tonne, hit­ting the gov­ern­ment’s rev­enue.

“There seems to be no floor,” Hockey told The Aus­tralian Fi­nan­cial Re­view. “We are con­tem­plat­ing as low as US$35 a tonne.”

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