Top Iron Ore Producers Target Record Shipments To China

　　The world'sbiggest iron ore producers are targeting record shipments as lower output costsoffset plunging prices and less competitive mines shut down in China.

　　Vale SA, Rio TintoGroup, BHP Billiton Ltd and Fortescue Metals Group Ltd are still making moneyeven after prices of the steel-making ingredient dropped 36 percent sinceDecember to their lowest level since 2009. The companies are betting thathigher-cost producers will be squeezed out of the market.

　　Slowing steeldemand in China, which buys 67 percent of the seaborne iron ore supply, and newproduction capacity in Australia and Brazil have led to a global surplus thatGoldman Sachs Group Inc forecasts will more than double to 175 million metrictons in 2015. As mines in China close, the four companies are set to boosttheir share of the seaborne supply to almost 70 percent, according to CLSA Ltd,a broker and investment group.

　　"You've gotthe four major producers with very strong, world-class, lowest-costproduction," said Daniel Kang, an analyst at JPMorgan Chase & Co inHong Kong. "Even at current prices or lower, the economics of theirexpansion projects are very compelling."

　　Ore with 62percent iron content delivered to the Chinese port of Qingdao declined to$86.09 a ton on Wednesday, its lowest level since October 2009, according toMetal Bulletin Ltd. Prices are 55 percent below the record $191.70 reached inFebruary 2011.

　　The slump has away to go before the biggest producers are in the red. Rio Tinto has the lowestbreak-even cost at $42. BHP's is $51, and Vale is at $60 in terms of ore landedin China with 62 percent content, according to UBS AG estimates.

　　Rio Tinto, the topsupplier after Vale, plans to boost output to more than 330 million tons in2015 after an 11 percent advance to 295 million tons this year, the companysays. Vale will raise production by 8.4 percent to 348 million tons in 2015.BHP sees an 8.9 percent increase from its Western Australian mines in the yearfrom July 1, while Fortescue may boost shipments by 25 percent.

　　Even smallercompanies such as Perth, Australia-based Atlas Iron Ltd are predicting recordshipments this year. Atlas, with a break-even cost in the mid-to-lower $80s aton, predicts an increase of at least 12 percent in exports from its mines inthe mineral-rich Pilbara region starting July 1, according to Atlas' managingdirector, Ken Brinsden.

　　While profitmargins are being squeezed, higher-cost companies will have to cut outputfirst, he said in a conference call last week. Atlas will seek to create"more headroom" over time by cutting expenditures, Brinsden said.

　　There is less of acushion for suppliers in China, where about 80 percent of mines have costs of$80 to $90, according to estimates from Mysteel.com, a Shanghai-based adviser.About 25 percent to 30 percent of coastal mines have shut down, said AndrewHodge, an analyst at Wood Mackenzie Ltd in Sydney. Output in the country willcontract 15 percent to 282 million tons next year, JPMorgan estimates.

　　Nev Power,Fortescue's chief executive officer, said in an interview on BloombergTelevision in mid-August: "We are very comfortable at these prices, but wedo expect to see prices drifting up as the higher-cost production exits themarket."

　　Vale also seesprices rebounding as supply growth slows and mines close, Jose Carlos Martins,the Rio de Janeiro-based company's head of ferrous and strategy, told reporterson July 31.

　　While a quarter ofglobal supply is break-even or loss-making at prices now, and cuts arehappening, high-cost production may be slow to withdraw from the market, DanielMorgan, an analyst with UBS, wrote in a report dated Thursday.

　　Prices may havefurther to decline. Goldman Sachs sees iron ore dropping as low as $75 in 2015,13 percent below levels now, and averaging $80 over the year. The median of 13bank forecasts compiled by Bloomberg is for $96, down from $105 this year.Commerzbank AG has the highest prediction at $110.

　　"We've beenthe most bearish for a long time," said Christian Lelong, a Goldmananalyst in Sydney who has worked at BHP for seven years. "Seaborne supplyis very strong. Consumption of iron ore is not growing as strongly. You havetoo much iron ore, which means prices drop," he said last month.

　　Inventories atChinese ports climbed 28 percent this year and reached a record 113.7 milliontons in July, data from Shanghai Steelhome Information Technology Co show.Global supply excluding mines that have not secured financing and requireapprovals is poised to grow 8.6 percent next year to 1.44 billion tons asproducers in Australia and Brazil expand, Bloomberg Intelligence estimates.

　　China's weakeningproperty sector is damping the outlook for steel, Goldman said. However,Fortescue's Power is "firmly confident" in China's growth as urbandevelopment fuels steel use, he said on Aug 20. BHP sees Chinese steel outputrising to 1.1 billion tons in the next decade.

　　(Source: Xinhua)