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11-09-2014, 05:31 AM
Iron ore price collapse to cost big miners $10bn
THE AUSTRALIAN SEPTEMBER 11, 2014 12:00AM
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Barry FitzGerald
Resources Editor
Melbourne
Sarah-Jane Tasker
Reporter
Sydney
Iron ore break-even prices
THE iron ore price collapse is set to punch a $10 billion hole in the profits of leading iron ore producers Rio Tinto, BHP Billiton and Fortescue Metals over the next two years, taking Canberra tax receipts down in the process.
The profit crunch could be more severe if, as some watchers suspect, prices for the steelmaking raw material weaken further from its present level of $US83.20 a tonne — a price now down by 38 per cent on last (calendar) year’s average of $US135 a tonne.
The sharp retreat in prices since the start of the year has focused market attention on the small and higher-cost producers, whose viability is being challenged by the price slump.
But now attention is turning to the profit impact of the price fall on the big and low-cost producers, and what that means for the pace of capital returns in the case of Rio and BHP, and in the case of Andrew Forrest’s Fortescue, its ability to reduce its debt to levels that would allow a big increase in its dividend payments.
Macquarie has been one of the first of the big-name brokers to quantify the profit impact on the big three after slicing its iron ore price expectations by 5-20 per cent for the 2014-2019 period.
More immediately, it has cut its 2015 price expectation by 16 per cent to $US92 a tonne and its 2016 expectation by 18 per cent to $US90 a tonne. While both forecasts imply a price recovery, the lower price “deck’’ still has a dramatic impact on profit expectations for Rio, BHP and Fortescue.
Macquarie has slashed Rio’s 2015 profit expectation from $US10.5bn ($11.5bn) to $US9.1bn. For BHP the reduction is 9 per cent to $US12.4bn and for Fortescue — a single commodity company — the fall is a more dramatic 41 per cent to $US1.8bn.
The collective profit hit is $US3.93bn next year, rising to a $US4.76bn hit in 2016 ($9.5bn in all at today’s exchange rate). Macquarie noted that the new and lower forecasts meant its estimates were now well below market consensus, suggesting a catch-up elsewhere and likely pressure for more share price pain.
Meanwhile, Goldman Sachs, one of the original bears on the iron ore price, said yesterday that its predicted price decline had come sooner than expected.
Analyst Christian Lelong said the price fall had been dramatic, and that a weak demand outlook in China and the structural nature of the over-capacity meant a recovery was unlikely. “In our view, iron ore has already transitioned to an exploitation phase where the commodity prices are typically subject to the deflationary pressure of mining productivity and the depreciation of commodity currencies,” he said.
The investment bank maintains its $US80 a tonne forecast for 2015, with it falling to $US78 a tonne by 2017. That compares with peak prices of $US190 a tonne in 2011 and last (calendar) year’s average of $US135 a tonne.
The great hope of the iron producers, backed by most analysts who are tipping a December quarter rebound in prices to as much as $US100 a tonne, is that relief will come when China starts re-stocking and when its high-cost domestic producers drop out of the market.
But Mr Lelong argued these safety valves would be tested given that stockyard space is finite and port restocking should play a more modest role from 2015 onwards. He warned that tier-two seaborne producers were increasingly vulnerable, with up to 40 million tonnes a year in seaborne capacity at risk of closure in both 2015 and 2016.
May Zhong, an analyst at Standard & Poor’s Ratings Services, said yesterday the ratings agency’s recent stress test on the sector found that if the iron ore price stagnates at about $US90 a tonne or less through 2015, some miners would face downward ratings pressure.
Major players, such as BHP, should have sufficient buffer to absorb lower iron ore prices, although they would have less flexibility at their current ratings to undertake debt-funded growth or capital-management initiatives, she said. “However, smaller miners that have substantial debt or expensive operations will wear the brunt of the impact.
“This may include companies such as (ASX-listed) Atlas Iron and (US-owned) Cliffs. The ultimate rating impact depends critically on a mining company’s financial flexibility, such as its ability to defer or delay capital expenditure and conserve cash.”
THE AUSTRALIAN SEPTEMBER 11, 2014 12:00AM
Save for later
Barry FitzGerald
Resources Editor
Melbourne
Sarah-Jane Tasker
Reporter
Sydney
Iron ore break-even prices
THE iron ore price collapse is set to punch a $10 billion hole in the profits of leading iron ore producers Rio Tinto, BHP Billiton and Fortescue Metals over the next two years, taking Canberra tax receipts down in the process.
The profit crunch could be more severe if, as some watchers suspect, prices for the steelmaking raw material weaken further from its present level of $US83.20 a tonne — a price now down by 38 per cent on last (calendar) year’s average of $US135 a tonne.
The sharp retreat in prices since the start of the year has focused market attention on the small and higher-cost producers, whose viability is being challenged by the price slump.
But now attention is turning to the profit impact of the price fall on the big and low-cost producers, and what that means for the pace of capital returns in the case of Rio and BHP, and in the case of Andrew Forrest’s Fortescue, its ability to reduce its debt to levels that would allow a big increase in its dividend payments.
Macquarie has been one of the first of the big-name brokers to quantify the profit impact on the big three after slicing its iron ore price expectations by 5-20 per cent for the 2014-2019 period.
More immediately, it has cut its 2015 price expectation by 16 per cent to $US92 a tonne and its 2016 expectation by 18 per cent to $US90 a tonne. While both forecasts imply a price recovery, the lower price “deck’’ still has a dramatic impact on profit expectations for Rio, BHP and Fortescue.
Macquarie has slashed Rio’s 2015 profit expectation from $US10.5bn ($11.5bn) to $US9.1bn. For BHP the reduction is 9 per cent to $US12.4bn and for Fortescue — a single commodity company — the fall is a more dramatic 41 per cent to $US1.8bn.
The collective profit hit is $US3.93bn next year, rising to a $US4.76bn hit in 2016 ($9.5bn in all at today’s exchange rate). Macquarie noted that the new and lower forecasts meant its estimates were now well below market consensus, suggesting a catch-up elsewhere and likely pressure for more share price pain.
Meanwhile, Goldman Sachs, one of the original bears on the iron ore price, said yesterday that its predicted price decline had come sooner than expected.
Analyst Christian Lelong said the price fall had been dramatic, and that a weak demand outlook in China and the structural nature of the over-capacity meant a recovery was unlikely. “In our view, iron ore has already transitioned to an exploitation phase where the commodity prices are typically subject to the deflationary pressure of mining productivity and the depreciation of commodity currencies,” he said.
The investment bank maintains its $US80 a tonne forecast for 2015, with it falling to $US78 a tonne by 2017. That compares with peak prices of $US190 a tonne in 2011 and last (calendar) year’s average of $US135 a tonne.
The great hope of the iron producers, backed by most analysts who are tipping a December quarter rebound in prices to as much as $US100 a tonne, is that relief will come when China starts re-stocking and when its high-cost domestic producers drop out of the market.
But Mr Lelong argued these safety valves would be tested given that stockyard space is finite and port restocking should play a more modest role from 2015 onwards. He warned that tier-two seaborne producers were increasingly vulnerable, with up to 40 million tonnes a year in seaborne capacity at risk of closure in both 2015 and 2016.
May Zhong, an analyst at Standard & Poor’s Ratings Services, said yesterday the ratings agency’s recent stress test on the sector found that if the iron ore price stagnates at about $US90 a tonne or less through 2015, some miners would face downward ratings pressure.
Major players, such as BHP, should have sufficient buffer to absorb lower iron ore prices, although they would have less flexibility at their current ratings to undertake debt-funded growth or capital-management initiatives, she said. “However, smaller miners that have substantial debt or expensive operations will wear the brunt of the impact.
“This may include companies such as (ASX-listed) Atlas Iron and (US-owned) Cliffs. The ultimate rating impact depends critically on a mining company’s financial flexibility, such as its ability to defer or delay capital expenditure and conserve cash.”