African Rainbow Sees Iron-Ore Correction After 37% Price Drop

Sep 04, 2014 9:48 am ET

Sept. 4 (Bloomberg) -- African Rainbow Minerals Ltd., the mining company controlled by billionaire Patrice Motsepe, said iron-ore prices will rise from five-year lows as the highest- cost output becomes unprofitable.

Ore with 62 percent content delivered to the Chinese port of Tianjin dropped 1.6 percent to $84.30 a dry ton today, the lowest since September 2009, according to the Steel Index, extending the decline since the start of the year to 37 percent.

“We don’t foresee that the iron-ore price is going to be sustainable at 85 for the next five to seven years,” Mike Schmidt, chief executive officer at Johannesburg-based African Rainbow, said in an interview today. “At 85, there’s about 300 to 500 million tons that’s under the water. There has to be a rerating and a correction somewhere down the line.”

African Rainbow, with its joint-venture partner Assore Ltd., is South Africa’s biggest iron-ore producer after Anglo American Plc’s Kumba Iron Ore unit.

Prices for the steelmaking ingredient have more than halved since peaking in 2011, entering a bear market as producers including BHP Billiton Ltd. and Fortescue Metals Group Ltd. are expanding supplies, pushing the market into a glut. Global seaborne output will exceed demand by 72 million metric tons this year and 175 million tons in 2015, Goldman Sachs Group Inc. estimates.

A correction may lift prices to as high as $90 a dry ton or $100 a dry ton, Schmidt said. “We don’t believe its 120 or 140,” he said.

Iron-ore mines operating at the high end of the cost curve, especially in China, are at risk of closing, according to Bloomberg Intelligence.

“Dozens of mines have already shut” and “bigger, lower- cost mines haven’t yet picked up the slack in production,” Kenneth Hoffman, who follows the industry for Bloomberg Intelligence, said in a Aug. 25 note.

Profit excluding one-time items from African Rainbow’s ferrous unit, which includes iron ore, manganese and chrome, comprised 91 percent of the company’s earnings of 4.1 billion rand ($384 million) for the year through June, it said in a statement today.

African Rainbow is investing in its manganese, platinum group metals and copper units to counter an expected decline in earnings from its iron-ore operations, Schmidt said.