The situation in iron ore looks just like the situation in oil and a lot of other commodities: continued production in the face of massive gluts and declining prices. From Jasmine Ng at bloomberg.com:
Biggest Australia miners won’t change behavior, Goncalves says
`Prices below $50 are not comfortable to anyone,’ CEO says
The biggest iron ore producer in the U.S. says its larger rivals in Australia are hurting themselves as well as their competitors as they ramp-up production in an oversupplied market.
With iron ore slumping to less than $50 a metric ton, revenues at the biggest miners are shrinking faster than costs, according to the head of Cliffs Natural Resources Inc., who said the majors’ expectations that rivals will quit the market aren’t being fully realized.
“Prices below $50 are not comfortable to anyone, including the majors,” Chief Executive Officer Lourenco Goncalves said in a phone interview from the company’s headquarters in Cleveland, Ohio on Tuesday. “The cost-cutting is not even close to offset their loss in revenues. My entire point: the loss in revenue, totally avoidable. Self-imposed. Self-inflicted.”
BHP Billiton Ltd. spokeswoman Emily Perry said on Wednesday the company wouldn’t respond to Goncalves’s remarks, while Rio Tinto Group sent comments from Brendan Pearson, head of the Minerals Council of Australia, which represents miners. There is open competition in the iron ore market and the Cliffs’ CEO shouldn’t be taken seriously, Pearson said.
Raising Output
Iron ore sank below $50 last week on expanded low-cost production from Rio, BHP Billiton and Brazil’s Vale SA, coupled with signs demand in China is contracting. The biggest producers are raising output as prices sag, betting that they can pare costs per ton and boost market share while less efficient miners face closure. Iron ore will decline gradually for years to come, Alan Chirgwin, BHP’s vice president of marketing for iron ore, has forecast.
Goncalves took the helm at Cliffs in 2014 after an activist-investor revolt, promising to end the company’s vulnerability to the oversupplied seaborne market. Shares in Cliffs have fallen 73 percent in the past 12 months as iron and steel prices have tumbled. Last year, Cliffs produced about 34 million metric tons of iron ore from mines in the U.S. and Asia-Pacific. Rio produced 295.4 million tons in 2014, filings show.
“In their imaginary world, 60 million tons of capacity will go offline this year, then another 125 million tons of capacity will go out of commission next year,” Goncalves said. “That’s not the case. Everyone is driving down costs, everyone is trying to continue to cope. You’re not seeing any meaningful number of tons going offline.”
To continue reading: Biggest U.S. Iron Ore Producer Says Rio, BHP in ‘Imaginary World’
