Some of the world’s biggest iron ore miners were Tuesday placed on “credit watch negative” by Standard and Poor’s, as ore prices plunge due to a supply glut and soft Chinese demand.
The global ratings agency said the credit watch change was due to a lowering of its iron ore price forecasts to US$45 per tonne for the rest of this year, to $50 for next year and $55 for 2017.
The previous forecasts were $65 this year and 2016, and $70 for 2017.
The price of the ore, a key ingredient in steelmaking, has fallen by 60 percent over the past 12 months to reach a decade-low of $47.08 in early April.
The eight iron ore producers being watched by S&P are Anglo-Australian giants BHP Billiton and Rio Tinto, Brazil’s Vale, Australia’s Fortescue Metals, Anglo-South African firm Anglo American, Chile’s CAP, Luxembourg-based Eurasian Resources and South Africa’s Exxaro Resources.
“The revision of our price assumptions and the sharp fall of iron ore spot prices reflect the severe supply and demand imbalance in the market, which we believe could persist for the next two years,” S&P said in a statement.
It added that the lower price forecasts were due to the continued increase in iron ore supply by major miners, softer growth in Chinese demand and higher-cost producers remaining in the market longer than expected.
S&P also placed Western Australia on credit watch negative, saying tumbling iron ore prices would “considerably reduce” its mining royalties. The state is heavily dependent on the mining sector for growth.
A credit watch meant there was a 50 percent chance of a rating change, which in these cases was downwards, S&P’s managing director for corporate ratings Anthony Flintoff said in a briefing, adding that the agency would announce its decisions within 90 days.
Ongoing concerns about the slumping price saw shares in BHP and Rio lose ground in Australia Tuesday. BHP fell 1.02 percent to close at Aus$29.12 while Rio slipped 0.62 percent to end at Aus$54.96.
– Battle for survival –
Atlas Iron, a West Australian junior miner, said last week it would suspend mining operations “due to recent significant falls in the iron ore price”.
“Despite an extensive cost-cutting programme, to which staff and contractors have made significant contributions, the global supply-demand imbalance for iron ore has driven prices down to the point where it is no longer viable for Atlas to continue production,” the company said in a statement.
The world’s four biggest iron ore exporters — BHP Billiton, Rio Tinto, Vale and Fortescue, which make up 70 percent of the market — have ramped up production to maintain their share of exports, exacerbating the price weakness.
Smaller miners such as Atlas, which have higher production costs, have been battling to survive.
Mining services firms were also expected to be hit by the slump as producers cut costs to stay afloat, S&P credit analyst May Zhong said in the briefing.
The decline in prices has been made worse by shrinking production costs on the back of weaker energy prices — helping to keep marginal producers alive — and falling currencies in commodity countries like Australia, the ratings agency added.
At the same time, China’s move last week to cut its resource tax by 60 percent from May 1 could add to the supply glut.
“The recent tax cuts to the domestic iron ore producers means that the marginal producers in China could stay in the market for longer because of that, and that may contribute to a prolonged period of iron ore price weaknesses,” said Zhong.
Australia’s Treasurer Joe Hockey warned Monday the iron ore price could drop to $35 a tonne, hitting the government’s revenue.
“There seems to be no floor,” Hockey told The Australian Financial Review. “We are contemplating as low as $35 a tonne.”