Iron Ore Glut From BHP to Vale Seen Shuttering China Mines

May 07, 2014 11:41 am ET

(Updates with share prices in last paragraph.)

May 7 (Bloomberg) -- Surging global supplies of seaborne iron ore will challenge producers of the steel-making raw material in China, probably forcing some higher-cost capacity in the country to close, according to BHP Billiton Ltd.

The gain in global production is being led by Australia and Brazil and their new, low-cost output will displace marginal suppliers in China, Michiel Hovers, vice president of iron ore marketing at BHP, said at an industry conference today. Vale SA, the world’s biggest producer, plans to raise output almost 50 percent by 2018, Claudio Alves, global director marketing and sales, told the gathering in Singapore.

The biggest producers including Vale, BHP, Rio Tinto Group and Fortescue Metals Group Ltd. have invested billions of dollars to expand output, betting on sustained growth in demand from China, the biggest buyer. Iron ore fell into a bear market in March amid forecasts for a global glut. Fortescue wouldn’t cut output even if prices extend declines as its costs are low, Business Development Manager Zhuang Binjun said today.

“Seaborne supply growth will come largely from Australia and Brazil,” said BHP’s Hovers. “This new supply will be low- cost seaborne and displace marginal supply from high-cost domestic Chinese producers and other lower-quality iron ore imports into China.”

Slumping Prices

Ore with 62 percent content delivered to Tianjin lost 22 percent this year to $105.10 a dry ton today, according to data from The Steel Index Ltd. The benchmark fell to $104.70 on March 10, the lowest level since 2012. While prices may be firmer over three months, there may be a drop below $100 a ton over six months, toward $90, on the new supplies, Kamal Naqvi, global head of metals at Credit Suisse Group AG, told the conference.

If prices drop to $100, output in China may be hurt as domestic mines with high production costs are forced to cut output or close, according to the Bureau of Resources and Energy Economics, Australia’s government forecaster. By comparison, Rio Tinto can be profitable above A$39 ($36), BHP’s break-even is A$41 ($38) and Fortescue’s is A$56, UBS AG estimated.

The scale of closures may be relatively limited because the shuttering of small mines in coastal areas will be partially offset by new projects and the industry will seek to improve its position through mechanization and higher productivity, Goldman Sachs Group Inc. said today.

“We continue to argue that the Chinese cost curve will not prevent seaborne iron ore prices from crashing through the $100 level going into 2015,” the bank’s analysts Christian Lelong and Amber Cai wrote in a report.

Vale’s Expansion

Global seaborne supplies will increase 126 million tons to 1.38 billion tons this year, Morgan Stanley estimated in a May 5 report. That’ll increase the worldwide surplus to 79 million tons in 2014 from 1 million last year, the bank forecast.

“What’s happening now is the major iron ore producers are bringing considerable new capacity,” Alves said in an interview, forecasting a rise of about 120 million tons this year and a further 100 million tons in 2015. “Most of the tonnage is very competitive,” he said.

Production at the Rio de Janeiro-based company will rise to about 453 million tons in 2018 compared with 306 million tons last year, Alves told the conference. Vale’s average cost of production in Brazil is $21 to $22 a ton, he said.

“It takes time to absorb all this pickup in iron ore supply,” said Alves, forecasting China’s imports will be more than 900 million tons this year from 820 million tons. “It will make some pressure in terms of price, create some volatility.”

The Tianjin benchmark fell for a fifth month in April, the longest losing run since August 2012, as growth in China slowed and seaborne supplies rose. The price will drop to $100 in the fourth quarter, according to Goldman Sachs Group Inc.

Vale rose 0.6 percent in Sao Paulo today, trimming the drop this year to 17 percent. BHP declined 2.2 percent this year in Sydney.

--With assistance from Phoebe Sedgman in Melbourne.