uploads///Quarterly production

Can Cutbacks in Production Help Iron Ore Prices?

Anuradha Garg - Author
By

May 14 2015, Published 2:02 p.m. ET

Vale, BHP Billiton, and Fortescue could curtail production

During its conference call on April 30, Vale’s (VALE) management mentioned that the company could take out up to 30 million tons of high-cost iron ore from its operations—depending on market conditions.

The market welcomed this move. Iron ore stocks, including Vale’s stocks, gained after the news.

During its production results release on April 22, BHP Billiton (BHP) (BLT) commented that it’s deferring the Inner Harbor debottlenecking project. This will lead to a slower pace for its planned capacity of 290 Mtpa (million tons per annum). This has also helped improve sentiment in the oversupplied iron ore market.

In April, Fortescue Metals Group (FSUGY) mentioned that it wants to maintain production around 165 Mtpa instead of expanding to 185–200 Mtpa, as previously planned.

Article continues below advertisement

Rio Tinto stands firm on capacity expansions

In contrast, Rio Tinto (RIO) is standing firm on its capacity expansions. During its annual general meeting on May 6, CEO Sam Walsh said, “This year in the Pilbara we will continue our low-capital-cost brownfield expansions as we grow our capacity.”

Cliffs Natural Resources’ (CLF) CEO, Lourenco Goncalves, mentioned during the company’s 1Q15 results call that major miners will have to cut back on their expansion plans since additional returns won’t justify their huge investments.

Production cutbacks could be positive news for the ailing iron ore industry. It’s grappling with oversupply and weak Chinese demand. However, these production changes seem to be driven by reducing capex and curtailing production from high-cost operations.

For the current iron ore rally to be sustained, more moves need to be seen across the board. The above chart shows how the major three players are setting production records every quarter despite weakening demand.

BHP Billiton and Vale account for 17.8% and 2.6%, respectively, of the iShares MSCI Global Metals & Mining Producers ETF (PICK).

Investors can also consider the SPDR S&P Metals and Mining ETF (XME) to get exposure to this sector.

In the next part of this series, we’ll see how the exports from Port Hedland were in April.

Advertisement

Latest Rio Tinto PLC News and Updates

    © Copyright 2022 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.